The Longer-Term Trend - Saturday, Sept 16

The short-term uptrend is intact and there are very few hints of short-term market weakness. 

The chart below shows the SPX hitting new highs, and a healthy advance/decline line which is also hitting new highs.

Below is a look at the new lows. The two major exchanges couldn't be in better shape. New lows on these exchanges are at very low levels which is bullish. 

The only glitch I can find is that the AMEX new lows remain elevated. I believe that the AMEX lists mostly lower quality and very small companies, and these are under pressure at the moment.

The Long-Term Outlook

This chart is pointing to economic weakness this fall or winter. The ECRI is now barely above the zero level which is where the stock market gets wobbly. Below is a quote from a SeekingAlpha interview:

U.S. economic growth is now “about as good as it gets.” In fact, the downturn in Weekly Leading Index (WLI) growth, which has fallen to a 73-week low, is warning of waning economic growth prospects. Still, neither the U.S. nor any other major economies are at risk of sliding into recession for the time being.

M2 growth is also weak, and it is confirming the ECRI weakness. The small caps are still looking good, though, so let's not get too crazy bearish until stocks start to feel the impact of the slowdown.

This is the 20-year view of the ECRI above the SPX. The economy hangs in there until the ECRI dips under -5%, and we are still far above that level.

The market generally holds up fairly well while the ECRI is above -5%, except for the recent period late-2015. This chart is a reminder, though, of just how extended the stock market looks.

If the market is extended, does that mean stock prices are vulnerable to a correction, or does it mean that market forces are so strongly in favor of higher stock prices that an economic slow down won't have a significant negative impact?

Late 2014, the market suffered a decline, but bounced back until it rolled over again the following August. And this all occurred with the ECRI dipping well below the zero level over two periods of time.

It isn't a perfect comparison because a lot of things were very different back then. Mostly, the market was being forced into the idea of a less generous fed and the potential for higher rates, etc.

The bottom line is that the caution flag is waving, and that you have to decide for yourself how to handle it. It could be months before any economic weakness appears.

My approach to have a higher level of cash, and to let the indicators tell me if the market is starting to suffer. My favorite indicator is the level of new 52-week lows. To quote Mike Burk, "really bad things rarely happen to the stock market without an elevated number of new 52-week lows".

Outlook

The ECRI index is pointing to weak economic growth in the months ahead.

The long-term outlook is worrisome.
The medium-term trend is up.
The short-term trend is up.