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.)