What Can We Expect From The Stock Market Over The Next 3 Months?

Despite yesterday’s selloff, the stock market remains near all-time highs. After a solid half-year, many investors are wondering if their year-to-date gains will evaporate. Today’s headlines:

  1. 20% year-to-date
  2. Macro weakness in housing
  3. High sentiment
  4. Dow breadth
  5. Oil diverging from stocks
  6. Ray Dalio says “buy gold”

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

20% year-to-date

As of this Monday, the S&P had rallied 20% year-to-date. It’s not common for the stock market to rally this much by July, and the next 3 months usually experience choppiness with the stock market going nowhere.

Let’s look at some of the recent cases individually. Here’s 1998:

Here’s 1997:

Here’s 1995:

Here’s 1989:

Here’s 1987:

I think 2019’s easy gains are over. The next 3 months are unlikely to see strong gains. Sideways or downwards are more likely.

Macro weakness in housing

U.S. macro still mostly points to more economic growth. But rarely will macro be 100% positive or negative, and housing is one of the negative factors right now. Housing remains weak, and Building Permits just hit a 2 year low.

This chart demonstrates that Building Permits trends downwards before recessions begin (recessions in grey):

On its own, this is not a good sign for stocks. Here’s what happened next to the S&P when Building Permits fell to a 2 year low for the first time.

6 month forward returns lean bearish. Overall, this tends to happen before a bear market and recession begin

  1. April 2006: 1.5 years before a recession and bear market began
  2. May 2000: bear market started, recession 9 months away
  3. April 1987: 1987 stock market crash began 3 months later
  4. January 1979: 1 year before a recession began
  5. July 1973: bear market and recession started
  6. December 1969: bear market and recession started
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We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you ...

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