Near- and Medium-Term Stock Market Outlook

by: John Hampson

I took partial profits on my stock indices longs on Friday as the market action reflected Friday morning's post:

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I maintain the forecast of a mid-year correction/consolidation in an ongoing stocks cyclical bull and re-post the following two charts:

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Stock markets globally could potentially pull back here - see the similar wedge formations in the S&P500, non-U.S. shares index and Shanghai Composite in the top row here (Source: Chris Kimble).

Diving in closer on the Chinese index, it is at the bottom of its triangle threatening to break down, but it also has potentially made a near term double bottom within that structure.

And China leading indicators have recently turned up, suggesting that despite inflation cooling efforts, growth is set to accelerate. This could potentially provide the impetus for the Chinese index to break upwards out of its range rather than downwards.

(Click to enlarge) Source: OECD

Turning to U.S. leading indicators, the ECRI WLI could perhaps be rolling over from a peak here, though it's too early to tell:

(Click to enlarge) Source: Dshort / ECRI

But if it is rolling over, then historically stocks have not peaked for several months following the turn:

(Click to enlarge) Source: PFS Group

So, if leading indicators were to turn down and stocks press on to make a higher high in the next couple of months, supported by the remaining QE, then I would look to sell out of my remaining stock indices longs, and buy back in after the anticipated delayed correction, for the cyclical bull continuation into 2013.

However, if leading indicators do not turn down, then there remains the possibility of mid-year consolidation with an upward bias, re-posting this potential historical rhyme:

(Click to enlarge)

For the above reasons my strategy is a reduced long position on the stock indices until further evidence appears.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long stock indices.