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A popular leading indicator is deteriorating. Bearish for stocks?

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Summary:
The stock market is trading on light volume. Meanwhile, a popular leading indicator is starting to fall. Today’s headlines: Conference Board LEI Put/Call is trending upwards AAII is trending upwards Treasury yields continue to fall Gold and silver breakout? Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day. Conference Board LEI The Conference Board LEI (Leading Economic Index) is a popular leading indicator for the U.S. economy. And since the U.S. economy and stock market move in the same direction in the long term, this is also a useful indicator for the stock market. The Conference Board LEI has fallen a little over the past few months. Advisor Perspectives suggests

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The stock market is trading on light volume. Meanwhile, a popular leading indicator is starting to fall. Today’s headlines:

  1. Conference Board LEI
  2. Put/Call is trending upwards
  3. AAII is trending upwards
  4. Treasury yields continue to fall
  5. Gold and silver breakout?

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

A popular leading indicator is deteriorating. Bearish for stocks?

Conference Board LEI

The Conference Board LEI (Leading Economic Index) is a popular leading indicator for the U.S. economy. And since the U.S. economy and stock market move in the same direction in the long term, this is also a useful indicator for the stock market.

The Conference Board LEI has fallen a little over the past few months.

A popular leading indicator is deteriorating. Bearish for stocks?

Advisor Perspectives suggests that you can calculate the 6 month average of the 6 month rate-of-change to determine when a recession will begin.

A popular leading indicator is deteriorating. Bearish for stocks?

The Conference Board LEI’s 6 month average of the 6 month rate-of-change is now below 0.5%. While this may seem bearish on a chart, similar historical cases had too many false bearish signals.

A popular leading indicator is deteriorating. Bearish for stocks?

It’s better to wait for the 6 month average to fall below -1%, which is a more accurate bearish signal. This has not happened yet.

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

Overall, the Conference Board LEI is not sending a clear bearish signal yet. But should the Conference Board LEI continue to deteriorate over the next few months, then investors and traders should seriously watch out.

Put/Call ratio

After months of low Put/Call readings, the Index Put/Call has become more elevated. Its 50 dma crossed above its 200 dma for the first time since February.

A popular leading indicator is deteriorating. Bearish for stocks?

*If the above chart isn’t clear enough, here’s the 50 dma against the 200 dma.

A popular leading indicator is deteriorating. Bearish for stocks?

When this happened in the past, the S&P would often experience short term weakness. But 9 month forward returns were mostly bullish.

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

AAII sentiment

As the stock market remains in an uptrend, sentiment is rising. AAII Bulls has now exceeded 35%, for the first time in 10 weeks.

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

In the past, this was mostly a positive factor for stocks over the next year.

A popular leading indicator is deteriorating. Bearish for stocks?

Treasury yield

As the market prepares for rate cuts, the 3 month Treasury yield has tanked.

A popular leading indicator is deteriorating. Bearish for stocks?

Similar collapses in the 3 month Treasury yield were mostly bullish for stocks 3 months and 9 months later…

A popular leading indicator is deteriorating. Bearish for stocks?

… and short term bullish for the 3 month Treasury yield.

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

With the 3 month Treasury yield falling, the 10 year – 3 month yield curve is steepening. It is now above its 50 dma for 6 days in a row, for the first time since October 2018. In other words, a slight steepening after a long flattening of the yield curve.

A popular leading indicator is deteriorating. Bearish for stocks?

Is this something to be worried about, since the 10 year – 3 month yield curve steepens in a recession?

A popular leading indicator is deteriorating. Bearish for stocks?

Not quite.

A popular leading indicator is deteriorating. Bearish for stocks?

A popular leading indicator is deteriorating. Bearish for stocks?

The first attempt at a steepening yield curve usually isn’t enough. After a long period of flattening, the yield curve tends to chop around 0% before decisively steepening.

A popular leading indicator is deteriorating. Bearish for stocks?

And that’s what Fed policy suggests. The Fed is interested in cutting rates soon. But it is not interested in cutting rates at every meeting, which is what normally causes the yield curve to steepen.

Silver

And lastly, silver has broken out to a 1 year high.

A popular leading indicator is deteriorating. Bearish for stocks?

These breakouts are sometimes followed by a short term pullback, but tend to keep rallying 2-3 months later.

A popular leading indicator is deteriorating. Bearish for stocks?

We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you how to trade ALL THE TIME, even when our discretionary outlook is mixed. Members can see our model’s latest trades here updated in real-time.

Conclusion

Here is our discretionary market outlook:

  1. Long term: risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
  2. Medium term (next 6-9 months): most market studies are bullish.
  3. Short term (next 1-3 months) market studies are neutral-bearish.
  4. We focus on the medium-long term.

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

A popular leading indicator is deteriorating. Bearish for stocks?

Click here for more market analysis

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