Stock market on December 14, 2017: thoughts and outlook


*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. A Bitcoin crash will not bring spillover into the U.S. stock market
  2. The S&P 500’s target for the upcoming “small correction”.
  3. This is about as positive as U.S. economic data gets.

Please read What happens when the S&P 500 is above its 100sma for too long if you haven’t already.
3 pm: A Bitcoin crash will not hurt the U.S. stock market in a significant way.
Some large institutional investors and funds are concerned that the inevitable Bitcoin crash will spillover into the U.S. stock market. I think this concern is unfounded.
Investors and traders always overestimate the spillover effect. In reality, the U.S. stock market is more isolated than people think! The U.S. stock market is relatively isolated compared to other countries’ stock markets (e.g. Germany and China) because the medium-long term direction of the U.S. stock market is determined by the U.S. economy and U.S. corporate earnings. The U.S. has a relatively isolated economy when compared to e.g. Germany, China, Japan, Russia etc.
For example, the significant correction of 2015-2016 was not caused by China’s crash or oil’s crash. There was an internal U.S. problem as defined by our Medium-Long Term Model. Likewise, the significant corrections of 2010 and 2011 were not caused by European problems. There were internal U.S. problems.
The market cap for cryptocurrencies now exceeds $500 billion. In comparison, the market capitalization for the S&P 500 is $22 trillion. Crypto is tiny when compared to the U.S. stock market’s main index.
You also need to look at crypto’s market players. Crypto is primarily traded by non-U.S. speculators (i.e. China, Japan, South Korea). So if crypto crashes, U.S. investors won’t lose $500 billion. The loss will be shared with foreigners. In addition, crypto is primarily traded by small speculators, college kids who want to make a fast buck, and “the world is ending” doomsayers. Few institutional investors have significant investments in Bitcoin. In other words, these small crypto players are tiny when compared to institutional investors. Their eventual losses in the crypto space will not hurt the U.S. stock market.
5 am: The S&P’s potential targets.
A “small correction” is a 6%+ decline. Here are some potential price targets for the S&P 500.

  1. If the S&P doesn’t make a new all time high, then a 6% decline brings the S&P down to 2511. 2500 is a logical target here. The S&P always overshoots 6% by a little bit, and 2500 is a whole # support.
  2. The 200 sma is at 2466 and going up 1 point per day. A lot of “small corrections” take 20 trading days, which means the 200 sma will be around 2485. That’s a 7% correction. 7% corrections are more common than 6% corrections.
  3. 2466 is a 23.6% fibonacci retracement of the entire February 2016 – present rally.

Here’s a daily bar chart.

I think the 200 sma will be the most likely target. As the market goes down, every trader will be looking at this support. The 200 sma will be like a magnet for the S&P 500.
5 am: This is about as positive as U.S. economic data gets.
In terms of “beating/missing analysts’ expectations”, this is about as positive as U.S. economic data gets. Here’s the Citigroup Economic Surprise Index.

This doesn’t mean that U.S. economic data will start to miss expectations all of a sudden. The Economic Surprise Index can plateau for multiple months before falling. Although there isn’t a strong 1-to-1 correlation between the S&P and the Economic Surprise Index, there is a weak positive correlation. This means that U.S. economic data at the very least will not be a positive contributor to any S&P 500 gains over the next few months. U.S. economic data is no longer a bullish medium term factor.
This is very similar to Germany. German economic data is about as good as it gets right now (click here). Historically, the German stock market always fell whenever German economic data was this strong.

Conclusion

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.
*I also have a small Day Trading portfolio. Click here to view my day trades.

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