Studies: the stock market is going up. Separate the signal from the noise


There has been a lot of noise over the past week. “Turkish contagion”, “crashing commodity prices”, “weakness in emerging markets”, etc.
As U.S. stock market investors and traders, our job is to separate the signal from the noise.
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

Heavy Truck Sales are still trending higher. This leading indicator trends downwards before economic recessions and equity bear markets begin.


Housing Starts and Building Permits are still trending higher (despite a recent dip). These leading indicators trend downwards before economic recessions and equity bear markets begin.




Initial Claims and Continued Claims are still trending downwards. These leading indicators trend upwards before economic recessions and equity bear markets begin.




Inflation-adjusted Retail Sales are still trending higher. This leading indicator trends downwards before economic recessions and equity bear markets begin.


The Delinquency Rate on all loans are still trending downwards. This leading indicator trends upwards before economic recessions and equity bear markets begin.


Freight Transportation Services are still trending upwards. This leading indicator trends downwards or sideways before economic recessions and equity bear markets begin.


With that being said, the bull market and economic expansion don’t have a lot of years left (probably 1 year). The economy is getting close to full employment.

Medium term

The stock market will probably trend higher in the next 3-6 months.
For starters, financial conditions are still very easy and conducive of stock market gains.

Large cap stocks have underperformed small cap stocks for 5 months in a row. When this happens, the Dow, Russell, and S&P all go up in the next 3-12 months.



U.S. stock market investors and traders shouldn’t be too concerned about “Turkish contagion”. These sort of fears rarely materialize.

Moreover, U.S. stock market investors and traders should ignore the recent crash in commodity prices. When copper and gold prices have crashed (i.e. right now), the U.S. stock market usually ignores the weakness in commodities.

Short term

The U.S. stock market’s short term outlook (next few weeks) is a 50-50 bet right now. Volume is extremely light this week as kids prepare to go back to school in the U.S. With that being said, the NYSE’s Advance-Decline Line (breadth indicator) continues to make new highs.
This indicator has led the U.S. stock market higher this year.

Conclusion

The U.S. stock market’s medium-long term outlook is bullish right now. With regards to the short term, the S&P 500 is very close to making new all time highs. I expect it to make new highs within the next few weeks.
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