Stock market on February 23, 2018: 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.

Thoughts

  1. The S&P 500 is still stuck at resistance
  2. Watch Amazon and Netflix
  3. A small, short term bearish sign for the stock market.
  4. The stock market is rallying on declining volume. Not a bearish sign
  5. Trump’s tax cuts are even more bullish for stocks than you think.
  6. Retail stores are closing en masse. Not a bearish sign for the economy or stock market.

Read Study: the stock market will probably fall to its 200 sma
4 pm: the S&P 500 is still stuck at resistance
The S&P 500 is still stuck at resistance despite today’s rally. The S&P is still hovering around its 50 sma and 61.8% retracement.

My stock market pullback case needs this resistance to holds. If the S&P breaks above the 61.8% retracement, then I think my pullback case is wrong.
Remember, the stock market’s medium and long term outlook are decisively bullish.
3 pm: Watch Amazon and Netflix
I still think there’s a >50% chance that the S&P 500 makes a pullback before heading higher. But the short term is notoriously hard to predict, which is why my portfolio focuses on the medium-long term.
Here’s how we can tell if my short term case is wrong. Here’s how we can tell if the stock market doesn’t make a pullback before making new all-time highs.
The stock market’s rally year-to-date has been led by Amazon and Netflix. These stocks are on the verge of breaking out and heading much higher. If they breakout right now, then the stock market’s pullback case will become less likely.


3 am: A small, short term bearish sign for the stock market.
The stock market’s medium & long term outlook are decisively bullish. But I still think there’s a >50% chance that the S&P 500 makes a pullback before heading higher.
The S&P has signs of bearish intraday price action. The S&P has rallied in the morning and fallen throughout the afternoon over each of the past 4 days. The S&P is constantly being rejected by its 50 sma and 61.8% retracement on the daily bar chart.

3 am: The stock market is rallying on declining volume. Not a bearish sign.
The stock market has bounced on declining volume. Some traders think that this is a bearish sign. It isn’t. It’s an irrelevant sign.

The stock market ALWAYS bounces on declining volume after a correction. That’s because volume is always highest when the market is crashing. It’s perfectly normal for the stock market to rally on declining volume. Volume will naturally subside as panic induced by the correction subsides.
Volume is not a consistently useful indicator for predicting the S&P 500’s future performance.
3 am: Trump’s tax cuts have an even more bullish impact on global stocks than you think
Trump’s tax cuts are even more bullish for stock markets around the world than most people realize. According to Bloomberg:

IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending.
“What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.

This is already happening. Here are some examples.

  1. China thought about cutting taxes, but they decided against it because nobody pays taxes in China anyways. Tax evasion is rampant. Instead, the Chinese government is creating a lot of incentives to attract foreign investment.
  2. Canadian businesses are pressuring the government to cut taxes the way Trump did.
  3. Income tax cuts are coming in the next Australian budget.

The U.S. was relatively anti-business under Obama. The U.S. is now relatively pro-business under Trump. Every action that the U.S. makes is followed by other countries because the U.S. is still the world’s dominant economic force. The world is shifting towards a more pro-business attitude.
Lower tax rates = higher profits & corporate earnings. This is medium-long term bullish for stock markets around the world.
Retail stores are closing en masse. Not a bearish sign for the economy or stock market
U.S. retail stores continue to close. This is part of the “mall apocalypse” that the media discusses every now and then.

  1. JC Penny is closing 8 stores
  2. Bon-Ton is closing 42 stores
  3. Toys R Us is closing 182 stores (all the childhood memories I had there)
  4. Sam’s Club is closing 63 stores
  5. Macy’s is closing down 11 stores
  6. Sears and K-Mart are closing 103 stores
  7. J Crew is closing 50 stores
  8. Winn-Dixie is closing 200 stores

Historically, the shutting down of so many retail stores signals that the economy is in serious trouble. This is not the case today.
Retail Sales are still decent and growing.

This is merely the transitioning of retail from in-store to online. Industries change, and there is nothing bearish about old industries being replaced by new ones. E-commerce sales (e.g. Amazon) continue to soar. The business model for traditional retailers is dying.
Retail sales up = economy up. The economy and stock market move in sync over the long run. This is medium-long term bullish for the stock market.
Read Stocks on February 22, 2018: outlook

Outlook

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

  1. The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
  2. The S&P 500 has approximately 2 years left in this bull market.

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.

4 comments add yours

  1. Hey Troy,
    Say Republicans lose many of their seats in our next election; how would the market react to that? Any studies?

    • Historically, the stock market did better under Democrats than Republicans. Sounds counterintuitive, but here’s why:
      Democrats tend to get elected at the bottom of a recession because people want Big Government to save them when they can’t make ends meet at home. Republicans tend to get elected at the top of an economic expansion cycle because people are making money and they don’t want to pay more taxes.
      So really, it’s not the Republicans fault that the stock market underperforms during their time in power. It’s the voter’s fault.

  2. Looks like the S&P 500 has finally breached the resistance at 50 sma. I’m seeing a bunch of individual stocks breaking resistance levels today as well. Interesting times.

    • Yes, this looks more and more like the exception to the general rule: most corrections are not V shaped.

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