Stock market on January 17, 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 global bull market in stocks will not end in 2018
  2. Tech stocks are not insanely overvalued.
  3. Expect share buybacks to surge in 2018.
  4. The Economic Surprise Index is starting to fall.
  5. This economic expansion is extremely long. Bullish investors shouldn’t be concerned.

Read Which stock market sectors will outperform over the next few years
3 pm: the global bull market will not end in 2018.
An inverted yield curve typically precedes bear markets. Right now, 40 out of the world’s 43 biggest economies have positively sloped yield curves (i.e. not inverted). This means that a global bear market in 2018 is unlikely.
3 pm: the tech sector isn’t insanely overvalued.
This morning I stated that the tech sector’s valuation is almost identical to the S&P 500’s valuation. I stumbled across this chart today. It’s supposed to imply that the tech sector is insanely overvalued. Here’s the tech sector’s Price-to-Sales ratio vs the S&P 500’s Price-to-Sales ratio.

This chart is misleading. The tech sector has a much higher price-to-sales ratio simply because its profit margin is much higher than that of the average S&P 500 company.
3 pm: Expect share buybacks to surge in 2018.
U.S. corporations are bringing their overseas cash back to the U.S. And as expected, these companies will spend most of their repatriated cash on share buybacks, dividends, and M&A deals.
Apple just announced that it will bring almost all of its $250 billion in overseas cash back to the U.S. over the next 5 years. The vast majority of this will go to share buybacks and dividends.
Other companies that bring their cash back to the U.S. will likely do the same. This wave of share buybacks will be a medium-long term bullish factor for the U.S. stock market.
6 am: the Economic Surprise Index is starting to fall
In December 2017, I stated that the economic data is about as good as it gets in the short term (historically speaking). I predicted that the economic data will make a short term dip (i.e. deteriorate a little bit).
As expected, the Economic Surprise Index has plateaued and is falling a little right now. I don’t think the Economic Surprise Index will fall a lot right now. I expect it to plateau for at least a few more weeks. You can see that historically, the Economic Surprise Index can plateau for weeks/months before it begins to fall precipitously.

6 am: this economic expansion is extremely long. Bullish investors shouldn’t be concerned.
Bears frequently state “this economic expansion is too long. A recession will begin soon”. I disagree. They fail to understand why this economic expansion is so long.
Although this expansion is very long, it is also extremely slow. That’s because the previous recession was extremely severe, which meant that the economy took a lot of time just to recover back to normal. Notice how this expansion’s trough was extremely wide and flat (blue line in the chart below).

Hence, I believe the U.S. economy still has room to grow for a few more quarters (i.e. 2-3 years). This is a medium-long term bullish factor for the U.S. stock market.
Read Stock market on January 16, 2018: outlook

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.

9 comments add yours

    • She’s my assistant. She created the drafts for the posts. Sorry for the confusion.

      • All good, I was worried that we lost our very own Troy. Happy to see you and thank you for the hard work!

        • The blog is growing really quickly, so I got her to help handle some of the admin stuff.

  1. What if the correction does not start until June during the doldrums of the summer ? Seems like waaay too much momentum, institutional buying, corporate share buybacks to really get that 6-10% correction. Seems like they want to stretch this longest streak without a 6% correction for 6 months past the time that marked this longest stretch without a 6% correction

    • Matt, anything is possible. That could happen, but it’s a low probability event. There’s no 100% certainty in the markets.

  2. Still think the best indicator will be the parabolic weekly candles with the divergence in rsi which should start happening in the next 3-4 weeks which comes inline with the 2nd -3rd week in February like u stated

    • If the weekly candles are parabolic, how would you get an RSI divergence? A parabolic $ would simply = a rising RSI. RSI only makes a divergence when the uptrend starts to weaken.

  3. Troy it would be rising weekly candle bars that are weekning parabolic melt up candles with weakening rsi

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