- Perhaps my short term bearish case was wrong.
- New Home Sales: something to watch out
- Corporate revenues are booming as well. Medium-long term bullish for the stock market.
- Investors don’t need to be afraid of inflation (yet).
- The stock market falling below its 200 daily moving average isn’t a bearish signal.
3 pm. Perhaps my short term case was wrong
I expected a pullback in the short term before the stock market made a new all-time high. Perhaps my short term case is wrong. The S&P 500 has cleared above its 50 sma and 61.8% retracement resistances.
The medium and long term are still decisively bullish. This is why I prefer the medium-long term over the short term. The short term is notoriously hard to predict, even when using historical studies.
The market is becoming more and more one directional. Corrections used to have waves. They now tend to crash in 1 wave and rally in 1 wave (i.e. no pullbacks/bounces in between). That’s why the short term is becoming harder and harder to predict, while the medium-long term is still the same. Fundamentals determine the medium-long term, and fundamentals don’t change. An improving economy is still medium-long term bullish for stocks, and a deteriorating economy is still medium-long term bearish.
Focus on the medium-long term.
3 pm. New Home Sales: something to watch out for
New Home Sales have been falling for the past 2 months thanks to rising interest rates.
This is not a major concern for the bull market right now, but we need to watch this closely for further signs of deterioration.
- New Home Sales tend to fall for a 2 years BEFORE the equities bull market ends.
- The decline in New Home Sales is still part of a broader uptrend in New Home Sales. We have no confirmation that this is the beginning of a broad downtrend in New Home Sales.
- Interest rates are overbought (especially short term rates). Expect a medium term pullback in rates before they head higher. This means that New Home Sales won’t crash immediately.
3 am: Corporate revenues are booming as well. Medium-long term bullish for the stock market.
Bearish investors have said for years that “Corporate America’s earnings growth is coming primarily from cost cutting. Revenues are hardly increasing. This can’t go on forever.”
This is now false. Corporate revenue growth is going gangbusters. More than 3/4 of the S&P 500 companies have beaten revenue estimates for Q4 2017 earnings season. This is the highest % of revenue beats since 2008 (the beginning of this economic expansion).
- Earnings grew 14.8% in Q4 2017 vs Q4 2016.
- Revenues grew 8.2% in Q4 2017 vs Q4 2016.
- The big gap between earnings and revenue growth is primarily due to Trump’s tax cuts.
The stock market moves in sync with the economy and corporate earnings over the medium-long term. This is a bullish factor for the stock market.
3 am: Investors don’t need to be afraid of inflation (yet).
I demonstrated that rising interest rates aren’t consistently bearish for the stock market. I also demonstrated that rising inflation isn’t consistently bearish for the stock market.
The inflation study stated “Rising inflation isn’t bearish for the stock market. Stagflation is bearish.” But it didn’t say when the stock market will suffer under stagflation. Here’s the data.
- As you can see, the stock market suffers when inflation is under 0.9%. This is deflation, which occurs during most recessions and depressions.
- The stock market’s best performance is when inflation is between 0.9% and 2.1%.
- The stock market’s performance is ok when inflation is between 2.1% and 4.7%!
- The stock market’s performance is poor when inflation is above 4.7%.
Inflation is hovering around the 2% mark right now. Even if inflation rises another 2%, it will still sit comfortably under the 4.7% bearish mark. Hence, fears of inflation are overblown right now.
3 am: the stock market falling below its 200 daily moving average isn’t a bearish signal.
From a pure statistical perspective, there’s a >50% chance the S&P will retest its 200 daily moving average.
Conventional wisdom states that the S&P falling below its 200 daily moving average signals that a bear market has begun. This isn’t true.
Historically, the 200 daily moving average has been more of a long term bullish support than a bearish signal. A lot of “small corrections” bottomed near the S&P’s 200 daily moving average.
Remember: there are dozens of corrections for every 1 bear market. This is not a consistently useful indicator for predicting bear markets. Too many false positives.
Read Stocks on February 24-25: weekend outlook
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- 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.