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April 18, 2019: fundamental outlook for stocks

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Summary:
The economy and stock market move in the same direction in the long term. Hence, leading economic indicators are also leading indicators for the stock market. Thoughts *We’re seeing mixed readings in the leading economic indicators right now. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time. Inflation-adjusted Retail Sales are no longer trending upwards. This is a necessary-but-not-sufficient condition for bear markets and economic recessions. Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out. Initial Claims are trending downwards. Suggests that the bull market isn’t over. Continued Claims are trending sideways. Not long term bearish for U.S. stocks

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The economy and stock market move in the same direction in the long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

*We’re seeing mixed readings in the leading economic indicators right now. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.

  1. Inflation-adjusted Retail Sales are no longer trending upwards. This is a necessary-but-not-sufficient condition for bear markets and economic recessions.
  2. Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out.
  3. Initial Claims are trending downwards. Suggests that the bull market isn’t over.
  4. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Continued Claims starts to trend upwards significantly.

Inflation-adjusted Retail Sales are no longer trending upwards. This is a necessary-but-not-sufficient condition for bear markets and economic recessions.

April 18, 2019: fundamental outlook for stocks

Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out.

The latest reading for Banks’ Lending Standards tightened significantly. This is important, because credit is the lifeblood of the U.S. economy.

April 18, 2019: fundamental outlook for stocks

One data-point does not make a trend, so this is not yet a long term bearish factor. But if Lending Standards continue to trend higher throughout 2019, long term bulls should watch out.

In the past, Lending Standards tightened before bear markets and economic recessions began.

Initial Claims are trending downwards. Suggests that the bull market isn’t over.

Yesterday’s reading for Initial Claims went down and made a new low for this economic expansion cycle (from 197k to 192k). The key point is that Initial Claims is trending downwards

April 18, 2019: fundamental outlook for stocks

April 18, 2019: fundamental outlook for stocks

*Initial Claims leads the economy and stock market. Historically, it trends higher before a bear market in stocks started (see study).

April 18, 2019: fundamental outlook for stocks

We are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking).

Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Continued Claims starts to trend upwards significantly.

Yesterday’s reading for Continued Claims went down (from 1.716 million to 1.653 million). Continued Claims are trending sideways now, and could potentially trend upwards significantly over the next few months

April 18, 2019: fundamental outlook for stocks

Like Initial Claims, Continued Claims leads the stock market and economy.

April 18, 2019: fundamental outlook for stocks

We are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking).

April 18, 2019: fundamental outlook for stocks

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
  3. We don’t predict the short term because the short term is always extremely random. At the moment, the short term does seem to have a slight bearish lean.
  4. In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

April 18, 2019: fundamental outlook for stocks

Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our models.

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Click here for more market analysis

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