Stocks Outlook - Friday, August 17

Thoughts

1. Housing Starts went up a little and are still trending higher. Medium-long term bullish for the stock market and economy.
2. Building Permits went up a little and are still trending higher. Medium-long term bullish for the stock market and economy.
3. Implied currency volatility suggests that the U.S. Dollar’s top is near
4. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
5. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

1 am: Housing Starts went up a little and are still trending higher. Medium-long term bullish for the stock market and economy.

The latest reading for Housing Starts went up a little from its previous reading (1158k to 1168k). However, the key point is that Housing Starts are still trending higher.

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The economy and stock market move in the same direction over the long run. Housing is a leading indicator for the U.S. economy. Hence, an improving Housing Starts is a medium-long term bullish sign for the U.S. economy and stock market.

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This chart demonstrates how Housing Starts leads the S&P 500.

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1 am: Building Permits went up a little and are still trending higher. Medium-long term bullish for the stock market and economy.

The latest reading for Building Permits went up a little (1292k to 1311k).

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The more important fact is that Building Permits are still trending upwards.

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Like Housing Starts, Building Permits is a leading indicator for the stock market and economy. The stock market trends higher when Building Permits are trending higher. The stock market enters into a bear market when Building Permits are trending lower.

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1 am: Implied currency volatility suggests that the U.S. Dollar’s top is near

Emerging market stocks and currencies have been crushed by Trump’s trade war. This has caused the U.S. Dollar to surge.

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The gap between implied currency volatility in emerging markets and developed nations is extreme.

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The last 2 times this gap was so massive:

1. The U.S. dollar index was close to making a long term top.
2. The U.S. stock market was at the bottom of a bear market (this clearly doesn’t apply to today – U.S. stocks are near all-time highs).

This suggests that the notable underpeformance of emerging markets relative to developed markets looks poised to end.

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1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Yesterday’s reading for Initial Claims went down a little (from 214k to 212k). However, the key point is that Initial Claims are still trending lower right now. Initial Claims recently made a new low a few weeks ago.

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*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).

We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.

This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Yesterday’s reading for Continued Claims went down a little from the previous week’s reading (from 1.760 million to 1.721 million). But the key point is that Continued Claims are still trending lower right now.

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Like Initial Claims, Continued Claims lead the stock market and economy.

This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

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Outlook

Here’s what I think will happen based on my discretionary outlook.

1. 2018 will trend higher but will also be a choppy year.
2. The S&P 500 has approximately 1 year left in this bull market.