This is a guest post by Troy Bombardia, a private trader who shares fact-based market analysis at Bull Markets
The U.S. stock market recently made a new all-time high. What’s next?
The S&P 500 (U.S. stock market) recently made a new all-time high after 7 months.
So what’s next for the U.S. stock market? Let’s breakdown our market outlook into the long term & medium term. The “long term” refers to whether this is a bull or bear market. The “medium term” refers to whether there will be a “big correction” or rally.
- The stock market moves in the same direction as the economy in the long term. An improving economy = bullish for the stock market. A deteriorating economy = bearish for the stock market. Hence, leading economic indicators are also leading stock market indicators.
- The stock market’s medium term is determined by a mixture of fundamental analysis and technical anlaysis.
The stock market’s long term: still a bull market
The U.S. stock market is still in a bull market. However, this bull market probably only has 1 year left.
Initial Claims is still trending downwards. Initial Claims typically trends upwards before bear markets and economic recessions begin. Initial Claims will probably start to trend upwards in 2019 or 2020 (at the latest) because Initial Claims are extremely low right now.
New Home Sales are still trending upwards. New Home Sales typically trend downwards before bear markets start.
Heavy Truck Sales are still trending higher. Heavy Truck Sales usually trend lower before bear markets and economic recessions start.
Meanwhile, Delinquency Rates on loans are trending downwards. Delinquency Rates usually trend upwards before bear markets & recessions begin.
With that being said, there are some signs that the bull market will end in 2019 (i.e. this bull market has 1 year left).
The S&P made 4 consecutive all time highs this August. This is a rare occurrence: it has only happened 3 times in history:
In all 3 of these cases, the stock market either began a bear market or “big correction” within the next 1.5 years.
Meanwhile, the NASDAQ had a very rare “distribution day” in mid-July that before has only happened in 1999 (1 year before the stock market topped in 2000).
Moreover, the NASDAQ had a very strong downwards reversal in late-July 2018. This has also only happened in 2000 (at the previous bull market’s top).
The stock market’s medium term is also very bullish.
The stock market made a new high all-time high for the first time in 7 months. When this happens, the stock market usually keeps going up in the next few months. Double tops are very rare.
The S&P is up 5 months in a row right now. Forward returns are also very bullish (see study)
Meanwhile, the U.S. stock market has ignored “sell in May and go away” this year. When this happens, the stock market keeps going higher. Bearish seasonality has been ignored.
And lastly, the S&P’s RSI has become overbought for the first time in 7 months. When this happens, the stock market usually keeps going up.
So there you have it. The stock market will most likely be propelled higher by the extremely strong economy over the next year. However, this bull market doesn’t have a lot of room left.
- Valuations are extremely high.
- The economy is close to being “as good as it gets”. (e.g. Initial Claims is near historic lows).
But for the time being, momentum has returned to the U.S. stock market. When this happens, there are usually enough “buy the dip” and “chase the rally” investors to push the stock market higher over the next few months.
So my market outlook is simple.
- Bull market for another 1 year.
- Bear market begins sometime in 2019.
However, please note something. Predictions far into the future aren’t particularly useful because long term predictions are often impacted by exogenous and unpredictable events. Predict the next 1-2 steps instead of the next 10 steps. All we can say right now is “there’s no imminent bear market, but we’ll re-evaluate this case in 2019”.
You can see more market analysis from Troy Bombardia here -> Bull Markets