Studies: the final year of this bull market


The S&P 500 is now near all-time highs, whereas the Wilkshire 5000 Index has already made new all-time highs.
*The Wilkshire 5000 Index is the all-encompassing index for the U.S. stock market.

Based on where the Medium-Long Term Model is right now and the rate at which data is progressing, this bull market probably has 1 year left.
As always, the economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook. Here’s why:

  1. The stock market’s long term is bullish.
  2. The stock market’s medium term is bullish.
  3. The stock market’s short term is 50-50

Let’s go from the long term, to the medium term, to the short term.

Long Term

Q2 earnings season has been VERY STRONG (highest % of beats in the past 10 years). More importantly, leading indicators point to continued growth in forward earnings.
The stock market, corporate earnings, and economy all move in the same direction in the medium-long term. Rising corporate earnings = bullish for the stock market.

Initial Claims and Continued Claims are still trending downwards, which is bullish for stocks.


Meanwhile, stock buybacks are soaring in 2018. This represents a big additional demand for stocks this year, which has put a floor under the stock market. Stock buybacks will most likely boost stocks throughout the remainder of 2018.

However, several signs suggest that we are in the final year of the bull market. This bull market doesn’t have a lot of years left.
The NASDAQ is starting to exhibit signs that have only happened before in 1999. Earlier this week the NASDAQ experienced several large selloffs that before has only happened at the stock market’s peak in March 2000.

And in the previous week the NASDAQ experienced a very strong reversal day that before has only happened in 1999.

So in short, this bull market isn’t over, but it is limited in terms of TIME.

Medium term

The medium term remains bullish, which suggests that the S&P 500 (U.S. stock market) will go up in the next 3-6 months. Since there are only 5 months left in 2018, this means that the stock market will probably go up for the remainder of 2018, although it may do so in a choppy manner.
For starters, the S&P and NASDAQ have both gone up every single month from April – July. By going up every month from April – NASDAQ, the stock market has ignored “sell in May and go away” so far. When this happens, the stock market has a very strong tendency to go up in the next 3-12 months.


In addition, the Russell 2000 (small caps index) has gone up 5 months in a row, which is a sign of strength. When this happens, the Russell’s and S&P’s 3-12 month forward returns are very bullish.


And lastly, the stock market’s “buy the dip” mentality is very strong right now. Here’s the S&P 500.

When the “buy the dip” mentality is this strong, the stock market tends to go up in the next 3-6 months.

Short term

The short term is a 50-50 bet right now, as it is in most cases.

Conclusion

It’s been a tough half year, but it looks like we have been on the right side of the market for the most part in 2018.
The stock market’s long term and medium term outlook is bullish. The short term is a 50-50 bet right now.
I mostly ignore the short term, because no matter how certain you are about the short term, it is rarely better than a 50-50 bet. Focus on the medium-long term.
Click here for more market studies.

2 comments add yours

  1. Hi Troy,
    when you write:
    short term, you mean: 5-10 days
    medium term, you mean: 1week -1quarter
    long term you mean: 1quarter-2quarters-1year
    Is this the right way to interpret your time horizon you are talking about?
    Many thanks…

    • Short term is a few days to a few weeks (i.e. under 1 month)
      Medium term = 3 months to 9 months
      Long term is 1 year and above

Leave a Reply to Troy Cancel