The S&P 500 has made a 61.8% retracement and is now stalling. This is completely normal. Most 10%+ corrections have a 61.8% retracement and then a pullback or retest of the lows before heading higher.
The economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook. Here’s why:
We focus on the medium and long term. Let’s go from the long term, to the medium term, to the short term.
Long Term
Our long term outlook remains bullish. This bull market will probably last until Q2 2019, after which a bear market will ensue.
The economy and the stock market move in the same direction in the long term. Hence, leading economic indicators are also long term leading stock market indicators.
Most leading indicators are still improving. However, the economy is close to “as good as it gets”, which suggests that it’ll start to deteriorate in 2019.
While corporate Unit Profits went up this quarter, they have been trending downwards for a few years. This suggests that we are certainly late-cycle in this bull market.
Source: FRED
Heavy Truck Sales continue to trend upwards. Historically, Heavy Truck Sales trended downwards before bear markets and recessions began.
Source: FRED
Initial Claims is trending sideways while Continued Claims is trend downwards. Historically, these 2 data series trended upwards before bear markets and economic recessions began.
Source: FRED
Net Earnings Revisions are still positive. Historically, Net Earnings Revisions fell to zero when bear markets and recessions began. This figure will continue to fall in the next few months and will most likely turn negative in mid-2019.
