Stock market on January 25, 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. Sentiment isn’t extremely optimistic anymore
  2. Jim Coulter: my biggest concern is how little concern there is
  3. Most likely scenario: this bull market still has 2 years left.
  4. A stock market melt-up is guaranteed.

Study: longest rally in history without a 3% pullback
3 pm: sentiment isn’t extremely optimistic anymore
*Sentiment is usually used as a contrarian indicator.
Sentiment data from AAII was extremely optimistic just 3 weeks ago (considered to be a bearish sign). The latest AAII data shows that sentiment has backed off from such extremes, even though the stock market has been going up.


This is why I don’t use sentiment indicators in my models.
3 pm: my biggest concern is how little concern there is
Jim Coulter told CNBC that “my biggest concern is how little concern there is. Everything is too perfect.”
I find this kind of thinking to be odd. Based on this kind of thinking…

  1. Investors should be concerned and afraid to buy stocks when the economy is weak.
  2. Investors should be concerned and afraid to buy stocks when the economy is strong, which is when there’s generally too little concern.

In other words, investors should never buy stocks!
In reality, investors should not worry about buying stocks UNTIL they see significant problems in the economy or corporate earnings. The market and economy can remain in a “goldilocks” state for years.
All signs point to continued economic growth right now, which is medium-long term bullish for the stock market.
In addition, Coulter thinks that tech companies and startups will outperform during the next bear market. I completely disagree. I think tech companies and startups will crash the most during the next bear market.

  1. Startups have insanely high valuations compared to public companies. From a mean reversion perspective, startup valuations will fall the most when the broad market goes down.
  2. Many of these startups are unprofitable/barely profitable and rely on VC money to survive. When the stock market crashes, investors run for the hills. This makes raising capital almost impossible, which means that startups will die en masse.

4 am: Most likely scenario: this bull market still has 2 years left.
Historically, the yield curve tends to invert before the stock market enters into a bear market. I explained why I don’t think the yield curve will invert in 2018.
The pace of the yield curve’s flattening tends to slow down as the yield curve gets closer and closer to being inverted.
Based on the historical AVERAGE rate of flattening, the yield curve will become inverted in about 1.5 years from today. And since an inverted yield curve tends to precede a bull market’s top by 0.5 years, this means that the next bear market will most likely begin in 2 years.

Keep in mind that this is the MOST LIKELY scenario. It’s possible that the bull market will last a little longer e.g. 2-3 years.
4 am: a stock market melt-up is guaranteed.
The U.S. stock market ALWAYS soars in the final few years of a bull market. This is logical: the economy is usually on fire during the final few years of an economic expansion and investor sentiment is euphoric. Bears who bemoan “insanely high valuations” will miss out on massive profits.
The current equities bull market will most likely last 2 more years. So when gurus like Jeremy Grantham predict that “stocks will melt-up”, they are simply making a guess that’s based on historical fact. Stocks always melt-up in the final few years of a bull market.

Here’s how much the S&P gained in the final 2 years (504 trading days) of previous bull markets.

  1. 2005-2007: 30%
  2. 1998-2000: 37%
  3. 1971-1973: 29%
  4. 1966-1968: 35%

Read Stock market on January 24, 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.

3 comments add yours

  1. Hello Troy
    I am pondering if next bear market will begin without yield curve inverse
    this is an unprecedented bubble what has been boosted by governments
    and central banks
    therefore I think past data is no guarantee of future results
    5th wave( since february 2016 low ) has both probability of extention or sudden death
    we are entering in the final phase of bubble
    I think we had better prepare to get out of markets anytime when we feel
    something wrong
    kind regards

    • Yes Yokohama, it’s entirely possible that the next bear market will begin without a yield curve inversion.
      I think this is a low probability case. The economy is doing just fine, so this bull market has room to run. 2 years (based on the economic data and Medium-Long Term Model) is more than enough time for the yield curve to invert.

  2. At the current s&p Es price high of 2855, a 3% small pull back would be 85 handles. Which would target 2770

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