Stock market on December 27, 2017: thoughts & outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.

Stock index & news

  1. GE is not signalling a recession.
  2. After outperforming in 2018, the homebuilder sector will underperform the S&P in 2018.
  3. Guessing the next 6%+ “small correction’s” start.
  4. Potential bearish trigger for the S&P 500 in late-January or February

3 pm: GE is not signalling a recession or bear market for the S&P 500.
Here’s something funny that I came across today:
“GE stock has predicted the last 2 recessions. When the 50sma crossed below the 200sma (death cross), the economy was either headed into a recession or was already to a recession. The 50sma has recently crossed below the 200sma. This signals an impending recession right now.”

This “indicator” is silly. GE used to reflect the U.S. economy and Corporate America due to the nature of its business (conglomerate). However, the recent decline in GE’s stock has nothing to do with the broader economy. GE’s stock is tanking because GE’s business is sinking, not because the U.S. economy is deteriorating. The conglomerate business model is dying. That’s why GE’s stock has cratered in 2017 despite a massive rally in the S&P 500.
4 am: Guessing the next 6%+ “small correction’s” start.
It’s impossible to consistently and accurate guess the exact start date of a 6%+ “small correction”. Nevertheless, it is worth estimating the date.
As of October 2017, the current rally is the longest rally in history without a 6%+ “small correction”. Hence, I think the S&P 500 will make a small correction in Q1 2018.
Specifically, I think the correction will begin in February 2018. Here’s why.

  1. The market has begun to show signs of weakening price action. Price action tends to weaken for a while before the market can correct.
  2. More importantly, mid-late January includes corporate earnings season. The market doesn’t always go up on earnings season, but it’s hard to fall during earnings season.
  3. You can see this in seasonality. February is the weakest month from October-April while January is decent (thanks to earnings season).


4 am: Potential bearish trigger for the S&P 500
I think the S&P 500’s biggest potential bearish trigger will occur in late-January or early-February 2018.
German chancellor Merkel has until mid-January to form a grand coalition with the SPD party. (Merkel led the EU through the 2010-2012 crises). If she cannot form a coalition by February, she will be forced to form a minority government. The Euro will probably selloff on this event because nobody but Merkel can save the EU during the next crisis.
News such as this usually has NO IMPACT on the U.S. stock market.
But when the S&P 500’s rally is so long in the tooth, any random bearish news can trigger a selloff. The news is nothing more than an excuse for selling.
Merkel announcing a minority government government in February might start the S&P 500’s much needed 6% “small correction”.

Conclusion

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P will make a small 6%+ “small correction” in Q1 2018. This will not become a “significant correction”. The current rally is the longest one in history without a 6%+ “small correction”.
  2. 2018 will be much chopper than 2017. 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 have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.

9 comments add yours

  1. If u are predicting a small correction coming, why not sidestep it? Is this because of short term capital gains tax of getting in and out?

    • Yes, that’s part of the reason. One of the main problems with trading is taxes.
      But more importantly, I’m just following the Medium-Long Term Model. The model does not use my discretionary outlook.

  2. What where the analytics/fundamentals behind your daytrading model to trigger es short @ 2683?

    • That’s the proprietary model. Basically the market is moving into more of a short-term swing stage (as opposed to a strong trend). So while the Day Trading Model normally only goes long, now it is going both long and short.

  3. Troy, I have noticed many things that are counter to your research
    1). Your going short es “counter to your santa clause rally blog”
    2). Post fomc blog of market going down (never traded down )
    3) gold going down in December blog post (never happened) big rally in gold
    But still reading your blog, just losing money not following my own decisions.

    • 1. The short $ES is a day trade. It’s not short or medium term.
      2-3. Both of these were just short term studies. Short term studies are not as valid as medium-long term, which is why only 5% of my capital trades short term. Also, I don’t trade gold. Just sharing thoughts.
      What you trade is ultimately up to you. You should follow your own decisions. I’m just sharing thoughts.

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