Can US Bull market be still
alive this year since it started in 09?
As I make an analysis on the trend
of the stock market, fundamental and technical factor also is used from various
angles. It is pointless to hear that market is at risk to entre bear phase due
to a signal reason such as valuation or breadth divergence. It often makes a
wrong forecast. Rather, in my analytical tool on stock market, there are at
least 9 forces to affect market since it is a complex mechanism. These forces
include 1) Leading Indicator on Economy, 2) Employment, 3) Yield spread, 4)
Credit Condition, 5) Liquidity, 6) Inflation Cycle, 7) Valuation, 8) Market
Life and 9) Market Breadth.
1) Leading Indicator: Positive
Figure 1:
The Conference LEI still keep on the uptrend.
Source:
Conference Board
Figure
2: LED 6 month Rate of Change still is above 0 so it means the economy still is
not at risk on recession
Source:
Conference Board
Figure
3: 6 Month Diffusion Index still is at above warning level. (The latest reading:
80)
Source:
Haver Analytics
Figure
4: Philly Fed Leading Index still is above warning level
Source:
Federal Reserve Bank of Philly
Figure
5: Philly Fed Coincident Index (1 Month Diffusion Index) on Nov is 84 above
warning level. It shows most of states in US is expanding.
Source:
PFS Group
2. Employment: Positive
Figure
6: The Conference Board Employment Trend still is on the uptrend.
Source:
The Conference Board
3. Yield Spread: Positive
Figure
7: Treasury Spread: 10 yr Bond yield minus 3 month bill rate show the
probability of US
recession is still very low. However, this indicator should be used carefully.
Since 2008, Fed use QE to control long term bond yield. Its policy may damage
the predictability of this tool. In addition, deflationary force is strong
after 2008 financial tsunami. Economy may fall into recession regardless of
treasury yield spread that reflects contractionary monetary condition.
Source:
New York Federal Reserve Bank
4. Credit Condition: Negative
Figure 8: High Yield Bond ETF (JNK) is underperforming Investment Grade Fund
(LQD). Credit market no longer confirms a new high of S&P.
Source:
StockChart.com
Figure
9: Bloomberg Financial Condition Index can’t confirm S&P rally. This
divergence means some investor raise their risk aversion.
Source: Charlie Bilello
Figure
10: St Louis
Financial Stress Index also divergent with S&P Index shown above.
Source: St Louis Federal Reserve
5. Liquidity: Positive
Figure
11: S&P keep to rally before start of rate hike
Figure
12: It shows stock market will be at risk to entre bear market after the last
rake hike.
Source:
Ned Davis Research
Figure 13: Fed Senior Loan Survey shows most of US banks still are loosening
their loan standard.
(Net Percentage of Domestic Respondents Tightening
Standards for Commercial and Industrial Loans is negative) and demand for loan
is rising (Net Percentage of Domestic Respondents Reporting Stronger Demand for
Commercial and Industrial Loans). Liquidity still is ample in economy.
Source:
Federal Reserve Bank
However, indicators like yield
spread above should be used carefully because market is affected adversely by
strong deflationary force under a loosening monetary environment. 1937 bear
market that partly was triggered by what Fed tightened the liquidity too early
was a good example.
6. Inflation Cycle: Positive
Figure
14: The following charts show the historical performance of stock market under various
inflationary environments. US
economy stays at lower right hand column so it is good for bull market. (CPI:
1.32%)
Figure
15: Inflation still keeps at lower than its 5 year average so market is not at
risk at inflationary force.
Figure
16: The chart below shows average of the Four Valuation Indicators look
expensive at historical standard. However, don’t forget the valuation above
average level can keep longer than you imagine.
Source:
Advisor Perspective
8. Life: Neutral
Market Life is like a man’s life. Everyone
is close to death when he gets older. It can also imply to market that has its
age. For example, a bull market which extends 8 years and gains over 300% has a
higher chance to entre bear market (to die) than that only starting for 2 years
and gaining 80%.
Figure 17: Current bull market only extend the average level at margin with the numbers of trading days and % of change.
Source:
Chart of the Day
9. Market Breadth: Positive
Figure
18: There is a convergence between NYSE AD and S&P to make a new high. The
internal breadth of whole market still is still healthy.
Source: StockChart.Com
Figure 19: AD line often leads the market to reach a peak.
Figure 20: Percentage of S&P stock above 200 days Moving Average also is a good indicator to monitor the topping process. If S&P make a new high but % of stock above is lower than 60, it is a warning signal that market will get into trouble. Around 80% S&P stock above 200 DMA at new high on Dec shows still a healthy internal of market.
Source: Chris Puplava
Figure 21: 52-week highs if Russell 3000 still takes control the new lows in recent correction. The internal momentum is favorable to bull market.
Figure 22: Before 2000 market peak, the number of stock at 52 week lows took control of the market.
Figure 23: Like 2000 market peak, the number of stock at 52 week lows took control of the market before the market reached peak at 2007.
To sum up, after observing all these indicators, 1) Leading Indicator on Economy, 2) Employment, 3) Yield spread, 4) Credit Condition, 5) Liquidity, 6) Inflation Cycle, 7) Valuation, 8) Market Life and 9) Market Breadth, US economy is likely to keep on a expansion stage and loosening monetary environment and healthy internal of whole market can support bull market to be alive in the future 6 months to 1 year. However, divergence between the stock market and credit market is really a concern on recent rally. In addition, over 10% correction had not happened for over 3 years. We should be cautious of a dramatic correction at current level but I will take a long position if any pullback and correction happens in the future.
