Market Outlook: Another Week, Another Failed Rally. What’s Next For Stocks

*Data from 1993 – present

As you can see, this happened in 2000 and 2007-2008

Hence, there is an interesting dichotomy in our market studies:

  1. The technical indicator studies (e.g. mean reversion) are bullish 6-12 months later
  2. The stock market’s internals studies (sector-specific) are bearish 6-12 months later.

This dichotomy has not occurred until the past few weeks.

So what’s more important?

  1. The economy (macro)?
  2. Technical indicators?
  3. Stock market’s internals?

In my opinion, macro is the most important. Macro gives fewer false signals than technical indicators and the stock market’s internals.

When the stock market’s short term outlook is confusing, jump to the higher time frame (i.e. medium term). When the medium term is confusing, jump to the higher time frame (i.e. long term). And when the long term is confusing, focus on long term risk:reward. In other words, focus on the forest + risk:reward

For example, Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Short Term

The stock market’s short term is mostly a 50-50 bet right now, as it is most of the time. The market studies do seem to point to a slight bearish lean. I wouldn’t act on this because the short term is extremely unpredictable.

Conclusion

Here is our discretionary market outlook:

  1. For the first time since 2009, the U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward.
  2. The medium term direction is still bullish(i.e. trend for the next 6-9 months)
  3. The short term is a 50/50 bet

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.

 

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