While the stock market and bond market have surged over the past few months, U.S. macro data has weakened a little. This weakness is worth watching, but it is not significant enough to warrant a full blown recession (and the accompanying big bear market that follows these recessions).
Go here to understand our fundamentals-driven long term outlook.
Let’s determine the stock market’s most probable medium term 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.
*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.
Citigroup Economic Surprise Index
The Citigroup Economic Surprise Index measures how recent U.S. economic data releases stack up against analysts’ expectations. The index has “decoupled” with the S&P recently
While on the surface this looks scary, a rational trader/investor would look at the bigger picture and examine how useful these correlations actually are. Correlations break all the time. Not exactly “decoupling”.
Here’s a longer term look at the Citigroup Economic Surprise Index.
The Citigroup Economic Surprise Index has been under -30 for 20 consecutive days, which is quite low. Historically, such low readings were more bullish than bearish for stocks 1 month and 9 months later.
Because the Citigroup Economic Surprise Index doesn’t measure the state of the economy. It merely measures the state of economic data versus analysts’ expectations. Reality vs. expectation is a cycle. When reality constantly disappoints expectation, it will likely soon start to beat expectations.
Continued Claims (a key labor market indicator) is trending higher, which is worrisome considering that the economic expansion is late-cycle.
Continued Claims has been above its 6 month average for 15 consecutive weeks. Historically, this is more bearish than random for the S&P on all time frames.
If we filter down the historical cases to only ones in which Unemployment was under 5% (i.e. late-cycle), then we can see that this is how the previous 4 major bear markets started (1969-1970, 1973-1974, 2000-2002, 2007-2009)
This is worth monitoring, but do not panic immediately. It’s best to use Initial Claims together with Continued Claims. While Continued Claims is trending up, Initial Claims is still mostly trending sideways.
So not immediately bearish, but watch out if this persists for a few more months.
Chemical Activity Barometer
The year-over-year % change in the 3 month average of the Chemical Activity Barometer is now almost at zero. This can be used as a leading indicator for Industrial Production YoY % growth.
Here’s a longer term look at the Chemical Activity Barometer
Here’s what happens next to the S&P when the year-over-year change falls to 0.5%
The S&P’s forward returns are slightly less bullish than random.
S&P 500 Bullish Percent Index
With the S&P 500 now trending sideways, the stock market’s breadth is weakening. The S&P 500 Bullish Percent Index’s (a breadth indicator) 14 day RSI has now fallen below 50 after staying above 50 for a long time.
In terms of price action and breadth, this suggests that the recent rally is a bull market rally. The 2000-2002 and 2007-2009 bear markets saw weaker breadth thrusts that were not sustained for quite as long.
Here’s what happens next to the S&P when the S&P 500 Bullish Percent Index’s 14 day RSI falls below 50 for the first time in 50 days.
You can see that the stock market’s 6-12 month forward returns are more bullish than random. This goes against the weakness in macro data. When macro and price action conflict, I always go with macro. Price action changes over the decades. The dog wags the tail (economy drags corporate earnings, which drives the stock market).
As you probably know already, Consumer Confidence is extremely high. This is normal towards the end of an economic expansion when unemployment is low and consumers have money to spend. (Seems hard to believe when you hear the constant doom-and-gloom about how 40% of Americans don’t even have $500 in emergency savings, but it’s true).
Here’s the Conference Board’s Consumer Confidence.
Here’s the Conference Board’s Present Situation indicator. Once again, late-cycle.
Here’s the Conference Board’s Future Expectations
And here’s Future Expectations – Present Situation, a chart that has been quite popular in the media and social media over the past few months.
Looking at this chart it’s clear that “HOLY COW the only other time Expectations-Present Situation was this extreme was at the top of the dot-com bubble!”
A few caveats when looking at these indicators. Expectations – Present Situation does not have a lower limit. I.e. There is no rule saying that “extreme” can’t become more extreme. For example, this reading consistently bottomed at -60 from 1967 – 1995. Then from 1997-2000, extreme simply became more extreme.
Anyways, here’s what happens next to the S&P when Expectations – Present Situation is under -50.
Immediately bearish? No
Late cycle? Yes
This happened from:
- 1967 – 1969
Read Signs that the recent stock market rally is not a bear market rally
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.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.
Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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