Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

US Stocks - Why I am Short-term Bearish, Medium-term Bullish

Stock-Markets / Stock Markets 2018 May 20, 2018 - 12:47 PM GMT

By: Troy_Bombardia

Stock-Markets

To be clear: the Medium-Long Term Model currently states that:

  1. The S&P 500 (U.S. stock market) is still in a bull market.
  2. This 11.8% “small correction” won’t turn into a “significant correction”. Hence the stock market’s medium term downside is limited.

The Medium-Long Term Model predicts “significant corrections” based on a set of conditions. When none of those conditions are met (i.e. right now), it is highly unlikely for a “small correction” to turn into a “significant correction”. This means that the stock market will eventually make a new high given enough time.


Read this post if you haven’t already: Why isn’t the stock market going up despite very strong fundamentals.

With that being said, here’s my medium & short term outlook on the stock market from a discretionary point of view. I’m:

  1. Medium term bullish. The stock market will make a new high over the next few months.
  2. Short term bearish. The road to a new high will be choppy with pullbacks along the way.

Why I’m Medium Term Bullish

The economy and stock market move in the same direction over the long term. This means that leading economic indicators are also leading indicators for the stock market. This week’s analysis demonstrates that economic growth is still solid in the U.S.. There are no signs of significant deterioration.

For starters, the yield curve has not flattened in 2018. This buys the bull market some time because the yield curve typically inverts before an equities bear market and recession begin.

Initial Claims and Continuing Claims (leading indicators) are still trending lower. This supports the case that the equities bull market isn’t over.

Housing Starts (a leading indicator) and Industrial Production (sometimes a leading indicator) continue to trend higher.

With the stock market (S&P 500) having ALREADY fallen 11.8% from January-February 2018, the stock market’s medium term downside is LIMITED if it doesn’t make a “significant correction”.

Why I’m short term bearish

The U.S. stock market faces several short term problems here. These are mainly technical.

The Dow rallied 8 days in a row as of Monday May 15. Historically, this has been a short term bearish sign for the stock market. The stock market usually consolidated or made a pullback over the next few weeks. See study

And of course, there’s the standard technical analysis that you’ve probably already seen.

The S&P 500 is still stuck near its downwards sloping trendline without a clean breakout.

And of course the S&P 500 is facing resistance on its 61.8% retracement.

Small cap stocks (Russell 2000 Index) are leading the stock market higher. Russell’s daily RSI is getting a little high (this is not a meaningful concern right now, but will be if its RSI gets even higher).

But keep in mind that when the Russell leads the S&P 500, the stock market’s downside over the next 2 months was limited. Hence this is a short term bearish factor for the stock market but not a medium term bearish factor. See study

And one more thing. Everyone is freaking out about interest rates. Everyone’s talking about how a “breakout” in interest rates will kill the stock market and economy.

This argument is wrong on multiple levels.

For starters, the same people who argue “rising long term interest rates will kill stocks” are the SAME people who argue “the flattening yield curve will kill stocks”. These 2 arguments contradict each other:

  1. Rising long term interest rates (e.g. 10 year yield) usually prevent the yield curve from flattening.
  2. The yield curve usually flattens when the long term yields fail to rise significantly.

Hence, I believe that while the yield curve will continue to flatten over the next year, the increase in 10 year Treasury yields will be limited. These charts demonstrate that the 10 year yield only went up a little bit despite multiple Fed rate hikes from mid-2004 to mid-2006.

Lastly, I’ve seen countless arguments stating “it’s all over when the 10 year Treasury yield reaches 3.25%”. I disagree.

A “breakout” in yields doesn’t mean anything. Yields consistently went higher during the 1960s, but there was no bear market in stocks until the end of the 1960s (after interest rates had gone up for more than half a decade).

I agree with Michael Santoli from CNBC. Long term trendlines aren’t as useful as short term trendlines. Fundamentals determine the long term. Technicals are more useful for the short term.

Medium term overrides the short term

As I’ve said repeatedly here on the blog, the medium-long term is more important than the short term. Short term predictions are notoriously difficult, whereas medium-long term predictions are much easier to make.

A medium term trend that’s powerful enough can easily overpower the market’s short term bullish/bearish bias. That’s why I stick to the medium-long term.

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules