Stock market on January 22, 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 Economic Surprise Index is starting to decline. A short term bearish factor for stocks.
  2. Investors won’t shun the U.S. stock market just because foreign stock markets are “cheaper”.

Read Study: what happens to stocks when a new Fed chairman takes over
6 am: the Economic Surprise Index is starting to decline. A short term bearish factor for stocks.
There is a weak-moderate positive correlation between the Economic Surprise Index (short term fluctuations in economic data) and the S&P 500.
The Economic Surprise Index is already about as good as it gets.

A few economic indicators have missed expectations recently

  1. Jobs report
  2. ISM Services PMI (non-manufacturing)
  3. Factory orders
  4. Empire Manufacturing
  5. Philadelphia Fed Index
  6. University of Michigan Consumer Sentiment

I expect U.S. economic data to deteriorate even more in January (to be released in February) thanks to the U.S. government shutdown.
6 am: Investors won’t shun the U.S. stock market just because foreign stocks are cheaper.
The U.S. stock market has one of the highest P/E ratios in the world. Here are the P/E ratios for various countries.

  1. U.S.: 26
  2. Canada: 22
  3. UK: 15
  4. Russia: 6
  5. China: 18
  6. Japan: 28
  7. Australia: 16
  8. Valuations in many emerging markets are even lower. Some of these countries have single-digit P/E ratios!

The U.S. stock market’s relatively high valuation does not mean that investors will shun U.S. stocks in favor of foreign stocks. Investors do not invest based on P/E alone. They also take into consideration political and financial stability. Hence, valuations are naturally higher in countries that are politically and financially stable.
The U.S. has one of the finest political systems in the world. Hence, the U.S. stock market’s valuation will be higher than that of emerging markets over the long run. So even though emerging markets have low P/E ratios, I don’t expect global investors to jump out of U.S. stocks en masse and plow into emerging markets.
Read Stock market on January 19, 2018.

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.

2 comments add yours

  1. Well done with NFLX, I should have bought more pre-ER! I’ll keep a better eye on your day trades.
    But I am long em. mkts. and predict a secular bull 😉

    • The NFLX trade was luck. Any individual trade’s profit/loss is luck. It’s the entire portfolio’s P&L that counts.
      I agree that EM’s are in a bull market. Valuations are much lower, so they’ll probably outperform the S&P 500 over the next few years.

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