- A pullback in interest rates = medium-long term bullish for stocks
- A small, short term bearish sign for the stock market.
- Today’s economic data: medium-long term bullish for stocks
- Global QE is coming to an end. Not bearish for stocks (yet).
- Which stock market sectors will underperform and which sectors will outperform over the next few months.
Read Study: does the stock market NEED to make a pullback?
2 pm: A pullback in interest rates = medium-long term bullish for stocks
There is a moderately inverse correlation between stocks and interest rates right now. The S&P 500 fell today while the 10 year Treasury yield went up.
Interest rates are clearly in a bull market. However, I expect rates to pullback in the next few weeks.
- The 2year Treasury yield is extremely overbought (RSI) on a weekly bar chart.
- The 10 year and 30 year yields are up against big resistances.
A yield pullback over the next few weeks = a medium term bullish factor for the U.S. stock market.
2 pm. A small, short term bearish sign for the U.S. stock market
VIX barely went down over the past 2 days when the S&P 500 surged. As of 1:33 pm VIX has surged 10% while the S&P is down a mere -0.5%.
This is a small, short term bearish sign for the S&P 500. VIX spikes tend to come in pairs. VIX has only spiked once during this stock market correction. This could be the start of another VIX spike (i.e. stock market pullback).
Remember, the stock market’s medium-long term outlook is decisively bullish.
2 pm. Today’s economic data: medium-long term bullish for stocks
The latest readings for Consumer Confidence and Durable Goods Orders came out today. Consumer Confidence continues to increase. This is good for the economy because consumer spending accounts for the majority of GDP.
The year-over-year % change in Durable Goods Orders fell today. Is this bad for the economy? No.
Durable Goods Orders is not a good indicator for the whole U.S. economy. It provides a lot of false signals. Durable Goods Orders can decline even when the economy is on fire.
Remember, the economy and stock market move in sync over the long term. The U.S. economy is growing at a healthy pace right now, which is medium-long term bullish for the U.S. stock market.
3 am: Global QE has ended. Not bearish for stocks (yet).
The Federal Reserve, European Central Bank, and Bank of England are tightening for the first time since the last recession. A lot of bears are concerned that the end of Global QE will push the stock market into a bear market.
This isn’t entirely true. Global QE tends to end 1-2 years before a bear market or recession begins. This supports the case the the current bull market in stocks still has a few years left. A bear market is not imminent.
3 am: Which stock market sectors will underperform and which sectors will outperform over the next few months.
VIX spiked above 35 on February 5, 2018. This has happened 9 times since 1990. The stock market’s subsequent sector behavior tends to follow a similar pattern.
- “Safe haven”, slow-moving sectors like health care, consumer staples, and utilities outperformed in the 1 month after VIX’s spike.
- Cyclical “risk on” sectors like consumer discretionary and technology outperformed in the next 9 months. The previous “safe haven” sectors underperformed.
This makes sense. A VIX spike is usually accompanied by a stock market crash. A stock market crash rarely ends in a V shape. The stock market usually swings wildly for a month or two before heading higher decisively.
- “Safe haven” sectors like utilities tend to outperform when investor fear is still elevated.
- Cyclical “risk on” sectors like tech tend to outperform when fear has subsided.
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.