Here’s our long term, medium term, and short term outlook for the U.S. stock market…
This version of the original article, by Troy, has been edited* here by munKNEE.com for length (…) and clarity ([ ]) to provide a fast & easy read. For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE bi-weekly Market Intelligence Report newsletter (see sample here)
The economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook…Let’s go from the long term, to the medium term, to the short term.
Our long term outlook remains bullish. This bull market will probably last until Q2 2019, after which a bear market will ensue.
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 (which means that September 2018 likely wasn’t the bull market’s top). The usual chain of events looks like this:
- Big ticket sales (e.g. housing, auto sales) are the earliest leading indicators 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
- The labor market starts to deteriorate. Meanwhile, the U.S. stock market is still in a bull market. This hasn’t happened yet, but will most likely start to happen in Q1 2019
- The labor market deteriorates some more, while other economic indicators start to deteriorate. The stock market tops, and the bull market is over.
While the economic data suggests that September 2018 wasn’t the bull market’s top, let’s assume that we’re wrong. Let’s assume the worst case scenario, which is that September 2018 was the top.
Even if this is the start of a bear market, the stock market will probably soon make a medium term bounce. The big 40%+ bear markets (2007, 2000, 1973, 1969) don’t go down in a straight line. There are always big bounces along the way in the first 3-6 months of these bear markets as late buy-the-dip investors come in at what they deem to be “bargain prices”…
Here’s the random probability of the U.S. stock market going up on any given day, week, or month.
The data…[as detailed in the original article here shows]…:
- that rising interest rates aren’t consistently bearish for stocks. This goes against conventional financial belief…
- that emerging markets are finally starting to outperform U.S. stocks. When this outperformance ends, the stock market can experience short term volatility, but the medium term is bullish.
- that the VIX has mean-reverted (VIX’s weekly bar has finally closed below its upper Bollinger Band (20 weekly, 2 standard deviation) after spending 3 consecutive weeks above the upper Bollinger Band)… (Data from 1990 – present.) As you can see, the S&P 500 tends to perform decently over the next 2 months.
The 2 loss cases (October 27, 2008 and August 5, 2002) occurred AFTER the stock market had crashed 40%+ and the economy was deep in a recession. Context matters, and in this case the context is very different…
- that the Russell 2000 has finally broken its 6 week loss streak and when this happens, the Russell tends to go up 6-12 months later… (Data from 1987 – present)
- that over the past month the stock market made a very fast correction and also a strong bounce. As of last Thursday, the S&P’s 1 month rate-of-change was less than -5% (i.e. very quick correction) while the 3 day rate-of-change was more than +3% (i.e. very sharp bounce). When this happens, the stock market was always higher 3 months later.
>As of last Thursday, the S&P went up more than +1% for 3 consecutive days, after falling to a 5 month low….Such strong reversals can lead to short term weakness, but the medium term is bullish.
>Last Wednesday’s “gap up” was also exceptionally strong. The S&P’s daily LOW on Wednesday was more than 0.7% above the previous day’s HIGH. Such big “gap ups” are rare, and have always led to gains over the next 6-9 months.
>As of last Tuesday, the stock market’s sentiment was extremely bearish. The Put/Call Ratio’s 3 week average had exceeded 1.15. Historically, this usually led to a bounce over the next 2-3 months. (Data from 1995 – present)
The short term is mostly a 50-50 bet right now, although it’s unlikely that the stock market will go straight up from here right now.
- Not many of these quick and sharp 10%+ corrections see a V-shaped recovery. Most of them see the stock market swinging around at the bottom before heading higher. With that being said, the stock market is entering into a period of rather bullish seasonality from November – December.
- …[Given the] midterm elections…the stock market will probably rally from November to early 2019, even if there are short term declines along the way.
- Lastly, it’s worth noting that there is almost no insider selling right now.