Stock market on January 24, 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. Wilbur Ross’ comments on China was just an excuse for today’s stock market selloff.
  2. The Chemical Activity Barometer is bullish for the U.S. stock market
  3. Don’t use the bond market to predict the stock market’s top.

3 pm: Wilbur Ross’ comments on China was just an excuse for today’s stock market selloff.
Mainstream financial media feels the need to find a reason for every short term market movement. According to the media:

The stock market sold off on today’s Wilbur Ross comments.

This isn’t true. The stock market started to fall before Wilbur Ross’ comments hit the headlines. In reality, most day-to-day fluctuations are completely random. It might just be one large player taking profits.
The U.S. stock market is insanely overbought on a daily and weekly bar chart. When this happens, ANYTHING can trigger the stock market and push it down.


Does today’s selloff mean that the 6%+ “small correction” has begun? I think the odds are <50%. When the market is extremely overbought, it needs to make a bearish divergence before topping. This is probably the start of a bearish divergence.
*Trying to predict the exact market top is futile.
5 am: the Chemical Activity Barometer is bullish for the U.S. stock market

  1. The Chemical Activity Barometer is a leading indicator for U.S. industrial production.
  2. Since industrial production is a key and volatile component to the economy, the Chemical Activity Barometer is a leading indicator for the economy.
  3. Since the economy and stock market move in sync over the long run, the Chemical Activity Barometer is a leading indicator for the stock market.

The Chemical Activity Barometer is going higher right now. This means that the bull market in equities still has room to run. Historically, the Chemical Activity Barometer was either falling or flat before every bear market.

5 am: Don’t use the bond market to predict the stock market’s top.
A lot of investors like to make predictions such as “if interest rates rise another 1%, the economy will enter into a recession and a bear market/significant correction in stocks will begin”.
In reality, the correlation between interest rates and equity bull market tops is weak at best.

  1. The equities bull market topped in 2007 when the 10 year Treasury yield was at 4.5%
  2. The equities bull market topped in 2000 when the 10 year Treasury yield was at 6.1%
  3. The equities bull market topped in 1973 when the 10 year Treasury yield was at 6.1%
  4. The equities bull market topped in 1968 when the 10 year Treasury yield was at 6%
  5. The recession of 1990 began when the 10 year Treasury yield was at 8.5%
  6. The double dip recession of 1980 began when the 10 year Treasury yield was at 10.5% and 13.6%

As you can see, recessions and bear markets can begin when interest rates are anywhere between 4.5% to 13.6%. This means that investors should not use interest rates to predict equities bull market tops.
As the Fed continues to raise interest rates over the next 1-2 years, focus on the U.S. economic data and not the Fed’s rate hikes. We have no idea when rate hikes will start to adversely impact the economy. So just focus on the economy itself. The stock market and economy move in sync over the long run. When the economy deteriorates significantly, the bull market in stocks will top.
Read Stock market on January 23, 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.

4 comments add yours

  1. Troy all the data driven analysis is a huge breath of fresh air at the end of a weekday MSM news cycle. Thank you.
    I see that the CAB/Industrial data is available for manual download (hopefully API too) from the ACC’s site. Is that the kind of thing you’d include in the data repository you sent the survey about?

    • Yes. Except I’m trying to figure out how the license works for that stuff. CAB data isn’t public data

  2. Hello Mr. Troy,
    Regarding your – “Don’t use the bond market to predict the stock market’s top” write up is like comparing Apples to Oranges and then deriving a conclusion.
    All those dates mentioned in the article were Pre-QE days. We had not heard – helicopter money, -ve yields etc, etc in those days. To sum up, markets were Sane those days.
    Post QE, companies all over the world have borrowed trillions of trillions of dollars. Governments have borrowed trillions to survive and bridge their budget deficits. You must be aware that Debt level has gone up multifold post 2008.
    Companies have borrowed to buy back of shares, to artificially jack up the stock prices.
    Now, tell me, interest rates going up (ex. doubling in US 10Y yield) WILL IT NOT have any -ve effect(s) on the markets?
    If treasuries give you better returns than stocks, will not long term funds invest there?
    What justifies current valuations in the market, other than “free money”?
    With Regards,

    • Rising interest rates will have an effect on markets and economy. But it’s a matter of “when”. Rates typically need to be much higher than where they are now to push down the stock market.
      Even 3 more rate hikes in 2018 = historically low interest rates.

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