Stock market on January 16, 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 U.S. dollar’s decline is a medium-long term bullish factor for stocks.
  2. Share buybacks are about to begin.
  3. The financial sector will outperform over the next few years.

Read What happens when the stock market’s volatility is insanely low.
3 pm: The USD’s decline is a medium-long term bullish factor for stocks.
The stock market follows the U.S. economy and corporate earnings in the medium-long term.
Earnings estimates usually decline as the year goes on. This year is different. Earnings estimates have surged recently thanks to the Republican tax cut.

Investors are forgetting a major bullish factor for earnings and stocks: the U.S. Dollar’s bear market. As the U.S. dollar goes down, the USD’s year-over-year change becomes negative. This means that U.S. corporate earnings from overseas increase purely due to currency depreciation. This causes nominal U.S. earnings to rise, which is a medium-long term bullish factor for U.S. stocks.
I expect the USD’s bear market to last into 2019-2020. Here’s the USD Index on a weekly bar chart.

*Keep in mind that the USD’s decline doesn’t match an earnings increase 1-to-1. U.S. companies sell in foreign countries but also source in foreign countries (eg hire labor in foreign countries). So when foreign currencies appreciate, that appreciation also increases some costs for U.S. companies.
6 am: Share buybacks are about to begin.
After the Republican tax cut passed through Congress, I stated that increased share buybacks will be a medium-long term bullish factor in 2018. Looks like this is now a reality.
As expected, companies will most likely use their tax cuts to finance share buybacks instead of increased investment. Here’s Wal-Mart.

The tax cut will have a small impact on economic growth but an outsized bullish impact on the stock market via buybcks.
6 am: the financial sector will outperform this year.
The 10 year rate is on the verge of breaking out from a yearlong resistance. Once the 10 year breaks out, I expect it to rise to 3% before the possibility of a meaningful correction arises.

The S&P 500’s financial sector and interest rates have a positive correlation because rising rates = expanding profit margins for banks. I expect the financial sector to lead the S&P’s ascent this year because interest rates are on the rise.
Here’s XLF, the finance sector ETF, which has led the S&P 500 since interest rates bottomed in September 2017.

Outlook

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. The current rally is the longest one in history without a 6%+ “small correction”.
  2. The S&P 500 will close higher at the end of 2018 vs the beginning of 2018.

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

    • Yes and no.
      It’s not exactly a “stop loss”. It’s more of a set of backup indicators that tell us when a “small correction” will definitely turn into a significant correction/bear market (if the model wasn’t able to predict the significant correction or bear market in the first place). That way I don’t ride an entire significant correction/bear market down, which would kill UPRO.
      Kind regards,
      Troy

      • Troy,
        If I’m understanding correctly, if we do experience a 6 to 10% correction in the s&p500, you would ride UPRO down (18 to 30%) and only sell, if the back up indicators suggest a more significant drop is expected? Would you add to your UPRO position after a 6 to 10% pull back in the s&p500?
        Thanks for your time and clarifying. You are a significant source of help and information.

        • That is completely correct Tony. And no, I wouldn’t add to my UPRO position. It is what it is.
          Kind regards,
          Troy

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