Stocks Outlook - Thursday, Oct. 25

Thoughts

1. Fear & Greed Index (Sentiment Indicator) registers extreme fear.
2. New Home Sales are deteriorating. Bearish for the stock market in 2019
3. Building Permits are deteriorating. Bearish for the stock market in 2019
4. Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.

1 am: Fear & Greed Index (Sentiment Indicator) registers extreme fear.

CNN’s Fear & Greed Index (a sentiment indicator) is registering extreme fear right now.

Here’s how low this is.

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This tells you that the short term risk:reward increasingly favors bulls.

1 am: New Home Sales are deteriorating. Bearish for the stock market in 2019

New Home Sales’ latest reading went down from 585k to 553k. But more importantly, New Home Sales are finally starting to trend downwards.

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*New Home Sales tend to fall for 1-2 years BEFORE the equities bull market ends. New Home Sales is starting to trend downwards. This will be a bearish sign for the stock market in 2019.

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1 am: Building Permits are deteriorating. Bearish for the stock market in 2019

Building Permits’ latest reading went up a little, from 1249k to 1270k. But more importantly, New Home Sales are finally starting to trend downwards.

(Click on image to enlarge)

*Building Permits tend to fall for 1-2 years BEFORE the equities bull market ends. Building Permits is starting to trend downwards. This will be a bearish sign for the stock market in 2019.

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The next recession and bear market will probably be more similar to the 2000-2002 bear market than the 2007-2009 bear market. The recession will probably be shallow, but the stock market’s decline will be > 40%.

I highly recommend you read these 2 articles by Tim Duy and Bill McBride. No need to panic right now, but watch out if the weakness in housing continues in the next few months.

1 am: Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.

Perhaps this explains the recent stock market mini-crash.

Late-September to the end of October is the “blackout period” for stock buybacks. A “blackout period” = 5 weeks before an earnings report during which companies aren’t allowed to buy back their stocks.

*Earnings season is in the second half of October.

As you probably know, share buybacks have SOARED this year, putting a floor under the stock market. With the absence of share buybacks right now, the stock market is experiencing short term weakness. Once buybacks resume in November…. you put 2 and 2 together.

Buybacks are just 1 factor to consider, but they’ve been an important factor for stocks this year.

Remember this study from a few weeks ago:

The stock market usually rallies after a midterm election (e.g. November 2018).

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But the stock market also usually experiences some short term weakness before the election.

Outlook

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

1. The S&P 500 has less than 1 year left in this bull market (bull market top sometime in 2019).
2. The recent decline is just a correction in a bull market.

The Medium-Long Term Model is still bullish (for now). It does not foresee a “big correction” or bear market at this point in time. It ignore small corrections. It only sidesteps big corrections and bear markets.

The Medium-Long Term Model has been bullish since February 8, 2016 – present.