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.
*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.
- Personal Consumption is trending sideways/upwards. A bullish sign for stocks.
- Labor market conditions is trending upwards and suggests that the economic expansion is not over.
- Homebuilder sentiment is still in a downtrend. A long term warning sign.
- Industrial Production is still growing. Neither bullish nor bearish for stocks.
Personal Consumption is trending sideways/upwards. A bullish sign for stocks.
Personal consumption is trending sideways/upwards. This is a bullish sign for stocks.
However, historically when this starts to trend downwards, it signifies that we are at the later stage of a bull market and economic expansion.
Labor market conditions is trending upwards and suggests that the economic expansion is not over.
The Kansas City Fed creates a Labor Markets Conditions Index, which is turned into a momentum indicator. This measures the strength of the labor market.
The U.S. labor market is healthy right now. This suggests that the bull market in stocks, although late-cycle, is not over. You can see that labor market conditions fell to zero at the top of previous bull market peaks.
Homebuilder sentiment is trending downwards. A long term warning sign.
The latest reading for NAHB Homebuilder Sentiment went up from its previous reading.
The key point is that NAHB Homebuilder Sentiment is trending downwards. This downwards trend is not significant, so it is not a clear long term bearish sign for stocks yet. It is merely a long term warning sign.
If NAHB Homebuilder Sentiment continues to improve over the next few months, then this won’t be a warning sign for stocks.
Industrial Production is still growing. Neither bullish nor bearish for stocks.
Industrial Production is still growing, although the rate-of-growth is falling a little.
This is neither bullish nor bearish for the stock market. In the past, Industrial Production growth usually peaked at the same time as the stock market. However, not all Industrial Production peaks are stock market peaks. So only with 20/20 hindsight will we know that a peak in Industrial Production implies that the bull market has peaked.
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. When our discretionary outlook conflicts with our models, we always follow our models.
Here is our discretionary market outlook:
- 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.
- The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
- 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.
- 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.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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