Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The US Economy is Getting Worse. What this Means for Stocks

Stock-Markets / Stock Markets 2018 Nov 30, 2018 - 02:17 PM GMT

By: Troy_Bombardia

Stock-Markets

The U.S. economy is starting to deteriorate, which is what typically happens in the last year of a bull market.

Let’s determine the stock market’s most probable direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.


*Probability ≠ certainty.

The economy is deteriorating

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

Leading indicators are starting to show some signs of deterioration, but not enough for the bull market to peak. The usual chain of events looks like this:

  1. Housing – the earliest leading indicators – starts to deteriorate. Meanwhile, the U.S. stock market is still in a bull market while the rest of the U.S. economy improves. The rally gets choppy, with volatile corrections along the way. We are here right now
  2. The labor market starts to deteriorate. Meanwhile, the U.S. stock market is still in a bull market. This will likely happen in the first half of 2019
  3. The labor market deteriorates some more, while other economic indicators start to deteriorate. The stock market tops, and the bull market is over.

Let’s look at the data.

*Read today’s fundamental outlook. Fundamentals determine the stock market’s long term direction. Technicals determine the stock market’s medium term direction. As we approach the end of this bull market, fundamentals are more important than technicals. There is not a single technical indicator that can consistently predict bull market tops (without too many false signals). That’s why fundamentals are useful.

Housing Months of Supply

As we mentioned in our fundamental outlook today, Housing Months of Supply has been trending upwards recently.

Is this immediately long term bearish for the stock market?

Here’s what happened next to the S&P after Housing Months of Supply exceeds 7.

*Data from 1964 – present

As you can see, the stock market tends to do well over the next 6 months, after which forward returns deteriorate.

In the final year of a bull market, the stock market goes up in a very volatile manner while the economy deteriorates.

Initial Claims

As we mentioned in our fundamental outlook today, Initial Claims has trended upwards a little recently.

While this will be a long term bearish factor in 2019, I don’t think it’s a cause for concern right now.

In our free Golden/Death Cross Model with Initial Claims Filter, we want to see Initial Claims rise above its 1 year moving average for 8 consecutive weeks (i.e. a sustained rise in Initial Claims). So far, Initial Claims has been above its 1 year moving average for 2 consecutive weeks.

Here’s what happened next to the S&P when Initial Claims is above its 1 year average for 2 consecutive weeks while the S&P is below its 200 day moving average.

*Data from 1967 – present

While this is slightly short term bearish for the stock market, it isn’t medium term or long term bearish for stocks.

Wait for Initial Claims to rise a little more before turning long term bearish.

Put/Call Ratio

The Put/Call ratio’s 20 day moving average was very high at the end of October, which coincided with the stock market’s bottom.

With the stock market bouncing off its lows, the Put/Call ratio has returned to normal.

Here’s what happened next to the S&P when the Put/Call ratio’s 20 day moving average went above 1.1 and then fell below 1 within the past month

*Data from 1995 – present

As you can see, this isn’t consistently bullish or bearish for the stock market on any time frame.

Big 3 day gains

Jodie Gunzberg (S&P Dow Jones Indices managing director, head of U.S. equities) said:

Is Jodie correct?

Here’s what happened next to the S&P 500 when it gained more than 4.2% over the past 3 days, while within 10% of a 2 year high.

*Data from 1928 – present

As you can see, this isn’t extremely bullish for stocks. Jodie’s mistake is that she uses limited data: “past 5 years”. Investors and traders should always look at the data holistically instead of selectively.

Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019. Then a bear market will ensue.
  2. The medium term remains bullish (i.e. approximately next half year).
  3. The short-medium term is mostly a 50-50 bet.

We focus on the medium term and long term. We mostly ignore the short term, which is usually just noise.

Our discretionary market outlook is not a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.

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 studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in