As always, the economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook. Here’s why:
- The bull market in stocks probably has only 1-2 years left (1 year is more likely than 2 years).
- The stock market’s medium term is bullish. The S&P will make new all-time highs in the coming months.
- The stock market’s short term weakness will probably continue for another week.
Let’s go from the long term, to the medium term, to the short term.
The Medium-Long Term Model is bullish right now. It doesn’t see a bear market or “significant correction” on the horizon.
With that being said, the equities bull market is definitely exhibiting late-cycle behavior right now.
For example, the tech sector has massively outperformed the utilities sector and consumer staples sector over the past year (see study).
This tends to happen either in the very beginning of a bull market or towards the end. Since we are clearly not in the very beginning of this bull market (which began in 2009), we must be near the very end. The last time tech outperformed by this much was in late-1998, less than 1.5 years before the bull market ended in 2000.
The High Yield Spread is going down while the Investment Grade Spread is going up right now. This is very unusual, and the last time it happened while stocks were going up was in September 1999, 6 months before the bull market topped in 2000.
In normal situations the High Yield Spread and Investment Grade Spread move in the same direction.
However, the bull market in stocks isn’t over yet.
Initial Claims and Continued Claims are the best leading indicators for the stock market and economy. These 2 indicators are still trending downwards (Continued Claims just made a new low). These leading indicators move inversely with the U.S. stock market.
Our market studies over the past week demonstrate that the stock market will probably make new all-time highs within the next few months.
For starters, the equities Put/Call Ratio is very low. While this is frequently used as a bearish contrarian indicator, facts and data prove otherwise.
When the Put/Call Ratio gets as low as it is right now, the stock market’s 6 months forward returns are very bullish.
Overbought momentum is bearish. But when momentum becomes extremely overbought, it means that:
- The stock market might make a short term pullback, but…
- The stock market’s medium term is bullish. Strength begets more strength.
For starters, this is the first time the stock market’s momentum has been very strong since January 2018. The S&P has once again touched its upper Bollinger Band.
Historical instances point to more upside for the stock market in the next 6 months.
The stock market’s strong momentum is more pronounced in small cap stocks, which continue to lead the S&P 500. The Russell 2000 (small caps index) is now up 7 weeks in a row. This means that:
- This streak might end next week and the stock market might make a short term pullback, but…
- The stock market’s 6 month forward returns are EXTREMELY bullish.
The stock market’s short term is still bearish, which is the same outlook as last week.
The Fed hiked interest rates this Wednesday. Historically, the stock market faces short term weakness up to 2 weeks after a rate hike.
VIX is sitting on trendling support, which was previously trendline resistance. A small bounce in VIX = a small pullback in the stock market.
This week was OPEX week (options expiration). The U.S. stock market’s historical performance after June OPEX has been weak, particularly in the large cap Dow index.
- The stock market’s long term outlook is bullish. January 2018 was not this bull market’s top. The bull market will probably end in 2019. The second half of 2019 seems more likely than the first half of 2019 based on the Medium-Long Term Model.
- The medium term is bullish. The stock market will probably trend higher over the next few months. This study suggested that the stock market will make a new high before summer 2018 is over.
- The stock market’s short term is slightly bearish.
Focus on the medium-long term. Short term “bearish” cases can be resolved using a sideways consolidation instead of a pullback.
Have a great weekend, and please share this on social media!