Stock market on December 8, 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. Strong correlation between interest rates and the S&P right now: a bearish sign.
  2. Another great jobs report is something investors should cheer, not worry about.
  3. Impact of corporate tax cut on the stock market and U.S. economy

3 pm: Extremely strong correlation between interest rates and the S&P 500
There is an extremely strong correlation between the 2 year Treasury yield and the S&P 500. Over a 200 day period, the correlation is +0.9! You can see this in the following charts.
*+1 is 100% correlation.

The 2 year Treasury yield is extremely overbought on EVERY SINGLE TIMEFRAME.
Here’s RSI (momentum indicator) overlapped on the 2 year yield’s daily, weekly, and monthly bar charts.

There’s an extremely high probability that the 2 year yield will make a multi-month pullback (to washout overbought momentum).
Of course, correlation is not extremely important for the U.S. stock market. Correlation works until it breaks, and correlation can break at any time. But at the very least, this is not a bullish sign for the S&P.
3 pm: Another great jobs report is long term bullish for the U.S. stock market
Total payrolls increased by 228k in November, and more importantly private payrolls increased by 221k. There was some additional bounceback from the hurricanes, but this was still a solid jobs report.
You’ve probably seen a chart like this, which states “this is the longest streak of positive employment gains in history”. (86 months and counting)

Seems bearish doesn’t it? Not at all.

  1. All it takes is 1 month of negative jobs growth for this streak to be broken. This streak doesn’t mean anything.
  2. All post-financial crisis economic recoveries are extremely long. There’s nothing abnormal about the length of the current economic expansion. The deeper the prior recession/crisis, the more time it takes to climb out of it.
  3. The BLS is getting better at compiling data for the Employment Report. There is less statistical noise. Jobs growth was much stronger in the 1990s than today, but there were still months when employment growth was negative!

3 pm: Impact of corporate tax cut on U.S. stock market and economy
Here’s the funniest thing I read today: “the Republican corporate tax cut results in a recession risk because any economic growth has already been priced into the U.S. economy”.
I disagree with this statement on 2 levels. I think the author confused “priced into the U.S. stock market” with “priced into the U.S. economy”.

  1. The tax cut hasn’t been priced into the economy at all because the tax cut hasn’t even happened! There’s still a chance that the tax cut doesn’t pass into law. Hence, few businesses are doing additional hiring/spending right now. If there is an impact on the economy, it won’t happen until after the tax cut has been signed into law.
  2. Yes, perhaps the tax cut has already been priced into the U.S. stock market in the short term. But it has not been priced into the market’s long term outlook at all. The tax cut will result in increased and ongoing share buybacks. That’s what happened after the 2003 Bush tax cuts. But these share buybacks will not increase until the tax cut has been signed into law.

I expect the value/volume of U.S. mergers and acquisitions to increase in 2018 if this tax cut is signed into law. When companies have too much cash on their hands and not enough business opportunities, their only 2 real choices are share buybacks and M&A.

Bottom line

In terms of my short term discretionary outlook, here’s what I think will happen (more on this in a weekend post).

  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 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.

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