The S&P 500 is now near all-time highs. So it looks like our medium and long term outlook over the past few months has been consistently right. So what’s next for the stock market?
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 stock market’s long term is bullish.
- The stock market’s medium term is bullish.
- The stock market’s short term is 50-50
Let’s go from the long term, to the medium term, to the short term.
Corporate profits are trending higher right now and leading the stock market higher. Corporate profits tend to trend downwards before bear markets and recessions begin. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “big correction” begins (see study)
High Yield Spreads continue to trend downwards, which is bullish for stocks. High Yield Spreads tend to trend upwards before bear markets begin.
Truck Tonnage is trending higher right now and leading the stock market. Truck Tonnage tends to trend downwards before bear markets and recessions begin.
The NYSE’s advance-decline line (breadth indicator) continues to lead the stock market higher.
Even though New Home Sales fell a little, New Home Sales is still trending higher and leading the stock market higher.
Initial Claims and Continued Claims are still trending downwards, which is bullish for stocks.
With that being said, this bull market probably has 1 year left. The NASDAQ is starting to exhibit symptoms that has only happened in 1999 (1 year before the bull market peaked in 2000).
With the S&P 500 close to making new all time highs, the stock market’s medium term outlook is bullish. It will probably make new highs shortly in the next few months.
When the S&P 500 is near all-time highs, it is pretty much GUARANTEED to go up in the next 3+ months (see study). Cases in which the stock market makes a marginal new all-time high and then collapses are extremely rare.
Meanwhile, the Russell 2000’s (small caps) uptrend has weakened a little recently. When this happens, the stock market tends to experience a little bit of short term weakness for the next 1-2 weeks before heading higher. see study
Meanwhile, the SKEW index has spiked. SKEW is supposed to demonstrate the probability of a “black swan event” (e.g. financial crisis).
However, SKEW is not as useful as you think it is. Its bearish signals often did not lead to financial crises or declines in the stock market (see study).
And lastly, the Economic Surprise Index is flirting with negative territory. This is meaningless for the stock market. It isn’t a medium term bearish sign for stocks.
The stock market’s seasonality in August is a 50-50 bet: neither bullish nor bearish.
With that being said, the S&P 500 might experience another week or two of short term weakness while it retests its breakout level.
It’s been a tough half year, but it looks like we have been on the right side of the market for the most part in 2018.
The stock market’s long term and medium term outlook is bullish. There is a small short term bearish tendency right now.
I mostly ignore the short term, because no matter how certain you are about the short term, it is rarely better than a 50-50 bet. Focus on the medium-long term.
Click here for more market studies.