Stocks Outlook - Monday, August 27

Thoughts

1. High yield spreads continue to narrow. A medium-long term bullish sign for the stock market.
2. Low levels of growth in margin debt suggests that the bull market still has room to run.
3. New Home Sales fell a little but are still trending higher. A medium-long term bullish factor for the stock market.
4. Building Permits are still trending higher. A medium-long term bullish factor for the stock market.

1 am: High yield spreads continue to narrow. A medium-long term bullish sign for the stock market.

High yield spreads have refused to trend upwards.

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This is a medium-long term bullish sign for the stock market and suggests that the stock market will continue to trend higher in the medium-long term. Bond market participants are smarter than stock market participants, which is why the bond market is a leading indicator for the stock market. Historically, high yield spreads widen (trends higher) before a bull market tops.

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1 am: Low levels of growth in margin debt suggests that the bull market still has room to run.

Margin debt continues to rise with the U.S. stock market.

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However, the year-over-year % change in margin debt is more important. The % change tends to spike towards the end of an equities bull market. Without a spike, the current bull market will most likely continue.

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1 am: New Home Sales fell a little but are still trending higher. A medium-long term bullish factor for the stock market.

New Home Sales’ latest reading went down from 638k to 627k. But more importantly, New Home Sales are still trending higher. This is a medium-long term bullish sign for the stock market.

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*New Home Sales tend to fall for 1-2 years BEFORE the equities bull market ends. We are watching out for signs of sustained deterioration in New Home Sales. There have been none so far.

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1 am: Building Permits are still trending higher. A medium-long term bullish factor for the stock market.

The latest reading for Building Permits went up a little (1292k to 1303k).

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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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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.