Stock market on December 29, 2017: 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. 1 large person/fund is smashing the S&P 500. This is not bearish price action.
  2. Margin debt is rising. This shouldn’t concern U.S. stock market investors and traders.
  3. How QE Unwind will impact the stock market, bond market, and yield curve
  4. The problem with going long VIX
  5. The return of share buybacks: a big bullish force in 2018 and 2019.

4 pm: 1 large person/fund is smashing the S&P 500.
I don’t like to use the word “manipulation”, but it’s clear that an individual has smashed the stock market on extremely low volume.
Today is the last day of the trading year. Volume by 3 pm is already razor thin (most traders and investors have left). So one player decided to smash the market while the market’s volume was extremely low.

This price action is not bearish and has zero impact on the medium-long term. It’s just the result of one market player trying to manipulate the market. I’m completely ignoring this.
*The Day Trading Model used this smash to take profits on a S&P futures short position. I’m pleased with how the Day Trading Model is working out so far.
3 pm: Margin debt is rising. This is not a concern.
Bearish traders tend to be scared when margin debt is rising. The words “too much debt” remind everyone of 2008.
In reality, the NOMINAL value of margin debt almost ALWAYS goes up when the U.S. stock market is going up. Margin debt is only a problem for the stock market when the two aren’t moving in sync.

  1. Margin debt is a concern when debt is going up but the stock market is not going up (i.e. investors/traders are piling on more and more debt, but the stock market is no longer reacting to that debt).
  2. Notice how the previous 2 bear markets began when margin debt plunged but the stock market did not.
  3. Today, the S&P 500 and margin debt are moving higher together.

The problem with NYSE margin debt is that it doesn’t paint a complete picture of the U.S. stock market. The NYSE does not control all the major U.S. exchanges.
8 am: The problem with going long VIX
VIX is extremely low, which makes this a very tempting long candidate to a lot of traders. Even a small decline in the S&P can result in a meaningful VIX spike.

But here’s the problem with VIX

It is not a guaranteed profitable trade the way some traders think it is.

In most situations, VIX will spike within 2-3 months of the previous spike.

But in the most extreme situation, VIX can go 5 months without spiking!

So unless VIX hasn’t spiked within the e.g. last 4 months, this is not a guaranteed profitable trade. VIX last spiked in November 2017.
7 am: The return of share buybacks in 2018 and 2019
Rising share buybacks are inherently bullish for the U.S. stock market over the medium-long term.

  1. Share buybacks increase as the economic expansion ages.
  2. Since the economy and stock market are tightly correlated over the long term, share buybacks increase as the bull market ages.


Notice how buybacks have been flat since 2012. This is a sign that the current bull market and economic expansion are not over.
Share buybacks will likely surge in 2018 and 2019 because the Republican tax cut leaves large corporations with a lot of spare cash. This is a new medium-long term bullish force for the current bull market.

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 historywithout 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.

2 comments add yours

    • Happy New Year to you too Dimitrios. I wish you and your family the best in 2018! 🙂

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