Stock market on January 23, 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. High Yield credit spreads continue to narrow.
  2. Why is the S&P 500 going up nonstop?
  3. Will the S&P 500 top at 3000? I doubt it.

3 pm: High Yield credit spreads continue to narrow.
The difference between “risky” high yields and “safe” Treasury yields continue to narrow as investors chase returns. The BofA Merill Lynch High Yield Spread continues to make new lows.

Some investors and traders see this as a medium-long term bearish sign. It isn’t. Historically, credit spreads tend to widen before a significant correction or bear market begins.

So when credit spreads are making new lows, it’s a bullish sign. The stock market doesn’t face the imminent risk of a significant correction or bear market.
5 am: Why is the S&P 500 going up nonstop?
This question is on everyone’s mind. It reminds me of something I noticed from reading 67 years of the Wall Street Journal.

No news is good news for the stock market.

The stock market doesn’t need good news to soar. Historically, the U.S. stock market tends to soar when there is no serious bad news. This was true in 1995, 2013, and from the second half of 2017 – present. There are no major concerns right now.

  1. The constant threat of government shutdown is a joke. Everyone knows that this is just a political bargaining chip used by both sides of the aisle.
  2. Trump-Mueller fears are dying down. If Mueller had discovered something that would seriously damage Trump’s presidency, he would have revealed it by now. These sort of investigations slowly fizzle out over time.
  3. The global economy is growing in sync. There are no significant problems on the global economic front.
  4. The ongoing geopolitical issues aren’t serious. After a lot of scary talk last year, North Korea’s threats are (once again) just a false alarm.
  5. Interest rates are rising. But this is a slowly moving force that does not impact the stock market or economy in the medium term.

In short, there are no fundamental reasons for a 6%+ “small correction” right now. On the other hand, the technical reasons are countless (extremely low volatility, longest rally in history, etc).
5 am: Will the S&P 500 top at 3000? I doubt it.
Many traders and investors think that the S&P will top at 3000 before beginning a 6%+ “small correction”. Why?

Simply because 3000 is a nice round number.

Historically, round numbers mean nothing when it comes to picking tops before “small corrections”. The correlation between tops and round numbers is almost completely random.

  1. The S&P did begin a small correction” around the time it first hit 2000. The S&P began a 9.8% “small correction” at 2019.
  2. The S&P didn’t begin a correction around the time it first hit 1000. The S&P began a 22.4% “significant correction” at 1190, almost 20% above 1000.

Smaller round numbers – in the denomination of hundreds – mean even less.

I’m not trying to say that the S&P won’t begin a small correction at 3000. The exact top is anyone’s guess. I’m saying that a top at 3000 is just as likely as a top at 2900, 3100, or 3200. There’s nothing special about 3000 despite it being a multiple of 1000.
Read Stock market on January 22, 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.

7 comments add yours

  1. Hello Troy
    Nikkei is making an ending diagonal triangle formation which both lines of
    support and resistance will cross around mid-february
    the next direction shuold be downward by Elliottwave theory
    Germany negotiation for coalition will be expired on mid-february
    Solar Eclipse will occur on february 15
    I highly focus on mid-february
    I think Millennials who have not experienced a big draw down will
    get punched hard on their face in the near future
    short-term(1-4weeks) traders should await until mid-february
    it is too early to short SP500

  2. Troy?
    October 8, 2007 s&p was at the high of 1576 which was the last trading high before the great financial crisis started its downward spiral. Adjusted for the s&p to double in value in a ten year period, would make s&p to be trading at 3,152 for the ten year period ending on October 8 2017. Keeping that in mind, the s&p is undervalued by that theory ad current trading price. This would be supported by warren buffets theory on population growth and goods & services consumption adding to corporate growth profits. As long as the worldwide population is growing, corporations continue to have revenue growth by its goods & services being consumed.

  3. Today, 396 days without a 5% pullback. We are up 13 out of the 15 trading days so far this year at record highs. Is there any studies on how many consecutive highs s&p made before a pullback, and studies on consecutive daily uptrend closes without a down day?
    Thank you Troy for helping out the small guys.

  4. Thank you for the post. I have assumed for some time that a price being at an all time high and a price being at a “round number” were not correlated, nice to see the confirmation on that.

    • I think round number support/resistances are more useful in forex than stocks. That’s my observation at least.

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