Stock market on December 11, 2017: thoughts and outlook


*As a Xmas gift to y’all, I built a Day Trading Model for the U.S. stock market. I’m running 5% of my capital on this model and I’m posting the trades here.
*These are my short term discretionary thoughts on the market.  My model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.

Stock index & news

  1. Ignore the potential government shutdown.
  2. A medium term problem.
  3. This is not a long term problem for the U.S. stock market.

4 pm: Ignore the potential government shutdown
The U.S. government will potentially shutdown in the next few weeks as the Republican tax bill makes its way through Congress. Historically, government shutdowns have had a mixed impact on the U.S. stock market. In other words, this is mostly an irrelevant factor for both the short and medium term.

If the government does shutdown in the next few weeks, any S&P 500 reaction will be random. There is no cause-and-effect relationship.
2 am: Don’t confuse medium term problems with long term problems.
As of the end of October 2017, the current rally is the longest rally in history without a 6%+ “small correction”. That’s why I think the S&P will make a 6-10% correction in Q1 2018 and break this record. This is a medium term problem for S&P bulls.
2 am: This is not a long term problem for the stock market.
This chart has been going around the financial world recently.

Looks scary doesn’t it? “The stock market will crash soon! It’s in a huge bubble!”
Well no. This is not a long term problem for the U.S. stock market. There are 2 reasons why allocations to stocks today are much higher than it was during past bull markets:
#1: Interest rates are historically low. In the 1950s, 60s, and 70s, househlds kept much of their wealth in bonds (government bonds, corporate bonds) because interest rates were much higher. With interest rates historically low, bonds just aren’t attractive to the average Joe. In other words, central banks have forced the middle class to buy stocks by depressing bond yields. This is the so-called “reach for yield”.

#2: There has been a significant change in the mentality of investors over the past 60 years. Most investors in the 1950s and 1960s lived through the Great Depression. Many of these investors at the time vowed to never touch stocks again. The idea of “contributing to a pension and investing in stocks” really only became mainstream in the 1980s! The 401(k) only came into existence in 1978!
In other words, allocating 40% to stocks today is equivalent to allocating e.g. 25% to stocks 50 years ago. Investors today are much more open to the idea of investing in equities than investors 50 years ago. This is a significant cultural shift.
So if you really think about it, allocating 36.3% of total financial assets to stocks isn’t a “bubble”. That’s just 1/3 of financial assets going to stocks.
 
 

Bottom line

In terms of my short term discretionary outlook, here’s what I think will happen.

  1. I think the S&P will make a small 6-10% correction in Q1 2018.
  2. Then the S&P will make a new high, before making a multi-month consolidation or multi-month “small correction” in the 2nd half of 2018.
  3. 2018 will be much chopper than 2017. As of October 2017, this is the longest rally in history without a 6%+ “small correction”. If you haven’t already, please read What will the S&P do after rising 8 consecutive months.

I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.

6 comments add yours

  1. Interesting! I didn’t realize that this was the longest bull market since 2000 without a 6% small correction. Interest rates are rising, but very very slowly.

  2. Troy, Thanks for sharing the graph. I had not seen it before. The % line in the graph is interesting. Historically, when households have low % wealth in equities, it is a good time to buy. Early 80’s, early 2000’s and late 2000’s. The current relatively high percentage now, suggests caution may be advised, but I have no idea what will happen in the future. I will trust your model, based on your back testing of its predicative capabilities. I know market values have a strong influence on the % in the graph, but it also suggests to me that generally speaking households likely buy more at higher prices and less at lower prices. Just the opposite of what they should do.
    Tom

    • Yes. The % line on the graph is very similar to Tobin’s Q (a valutaion indicator)

  3. Hi Troy
    Since 2009, the US Stock Market has been steadily moving upward and I see it the same, a correction seems overdue. I like your long term perspective, over the long term, stocks are the best investments, especially when quality is bought at an attractive price and dividends are reinvested.
    I found it particularily interesting when I looked at the chart of the S&P over the past years, it climbed really smoothly. The bulk of my investments is in European companies and I have to say that being invested in companies out of the SMI, DAX and Eurostox really it was bumpy – but also a very lucrative – road.
    Just when I think of January 2015 when the Swiss National Bank abandoned the euro peg and did not maintain the floor under the euro/Swiss franc pair (1.20 at that time) any longer. My euro stocks immediately “lost” almost 20 % in value against the Swiss franc and my Swiss holdings such as Nestlé, Novartis etc. fell within a couple of minutes. I can also remember the so-called Euro-Crisis and of course the Brexit Vote 2016. My portfolio did perfectly fine over the medium term and all these retreats were wonderful buying oportunities for me.
    Lately, I made kind of an experiment and calculated, if I would have been better off, if I had just invested a lump sum into the S&P in 2009 via an ETF. I came to the result, that it would have been pretty much the same, so I could have chosen the S&P and “enjoy” a very smooth upward trend. Nevertheless, I don’t really mind market fluctuations and I just love analysing and buying individual stocks.
    Cheers

    • Exactly. That’s also why I don’t trade individual stocks. I tried doing various calculations, and always concluded that I’m no better off than simply buying/selling an S&P ETF. Reflection on past trades/investments is the key to success.

  4. Very good info. I agree its been heck of Bull run. As a value investor, we ought to be happy when market gives us opportunities via correction :). Hopefully in a year or two, will see.
    Good Luck.
    TDK.

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