Stock Market Forecast June 2016 through November 2016:Negative

My near term stock market indicator has now turned red. My models do not predict a large stock market drop soon, but they do project that over the next few months the market is more likely to fall than to rise. This negative market outlook is likely to remain for at least the next several months.

(Click on image to enlarge.)

This is the second month that my econometric models expect the U.S. stock market to drop over the next 6 months -- by about 5%.  I calculate that there is about a 40% chance the market will break even in the next half year, versus a 74% chance on average.  For the past year or so the market has steadily performed worse than my forecasts so it wouldn't surprise me if the actual results come in somewhat worse than my pessimistic forecast. Something outside the scope of my models is causing the market to perform poorly.

What's behind this negative 6 month stock market projection? Typical seasonal market weakness is part of the reason: on average, but not always, the stock market performs worse during summer months than the rest of the year.  The bigger problem, however, is that as far as my model is concerned, there is little reason for the market to go up.  The market is near fair market pricing, leading economic indicators are weak, and interest rates appear more likely to go up a bit rather than falling.

As I noted above, the stock market has been performing somewhat worst than my models had expected.  Looking at the graph below, the market does appear to be following a normal seasonal pattern -- the colder months of the year are generally more favorable to the stock market than warm months.  Overall, however, actual market changes over 6 month periods have been distinctly worse than the models had predicted.  Over the past 6 months, for example, the market rose about 2.5%, but my models had forecast a much stronger 9% rise.  As always, the market will do whatever it 'wants' to do, but my models are getting gloomy.

(Click on image to enlarge.)

Stock Market Forecast May 2016 Through October 2016: Looking bad

May 2016 through October 2016:  Watch out. The six month stock market forecast is bad and the near term forecast is flashing yellow.  Next month the short term forecast will almost certainly turn red. My forecasting models expect the U.S. stock market to fall significantly over the coming half year; and that doesn't factor in the presidential election which is likely to create additional volatility.

The models predict that the stock market will decline about 6 percent from now through the end of October. The probability that the market will decline over the period is high.  The odds that the market will fall by at least 8% at some point over the next six months are high -- about 1 in 4.

As shown in the graph below, the stock market has performed below the expectations of the model for more than a year. If that continues, actual market results in the next six months could be significantly worse than the bleak forecast now given by the model.

(Click on image to enlarge.)

The immediate prospects for the stock market, however, are much less clear and are not as bad as the longer term forecast.  As shown below the short term forecasting model is now flashing a warning.  Based on the current negative 6 month forecast next month the short term forecasting model will probably be flashing a sell signal.

(Click on image to enlarge.)