Stock market on January 4, 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.

Discretionary outlook

  1. Investor sentiment is high. This is not a medium term bearish sign.
  2. Emerging Markets are very overbought (medium term)
  3. VIX just hit its all-time bottom again. Is a bounce ahead?
  4. The NASDAQ is at 7000 (round number resistance).

Also read What happens to the stock market when ISM Manufacturing is very high.
3 pm: Investor sentiment is high. This is not a medium term bearish sign.
The AAII Bulls – Bears spread just exceed 25 for the first time in 3 years.

This seems bearish. It isn’t.

  1. When AAII peaks, the S&P always gives up any gains in the next few months.
  2. However, the AAII spread can go a lot higher than where it is now. So we don’t even know if the AAII spread has peaked!

Ignore sentiment when trying to predict medium term tops.
11 am: Emerging Markets are very medium term overbought
EEM is the main emerging markets ETF. It is very overbought on a monthly bar chart.

Is this a bearish medium term sign? No. It’s mostly an irrelevant indicator. EEM’s monthly RSI has already broken above its RSI’s range from 2009-2015. This RSI breakout tell us that EEM’s market stage has changed. It will no longer swing sideways for the long term. Emerging markets have entered into a new bull market, like the one that ended in 2007.
When EEM is in a bull market, its monthly RSI can go much higher over the next few months. Its monthly RSI reached 88 in October 2007. So ignore “overbought” RSI. This isn’t a useful indicator for predicting medium term tops.
6 am: VIX just hit its all-time bottom again. Is a bounce ahead?
VIX has once again hit its all-time bottom. Here’s the monthly bar chart.

VIX is constantly trying to bounce off of this support. Here’s the daily bar chart.

This means that, at the very least, there is a short term bounce ahead for VIX. So perhaps buying VIX calls is a good idea? I don’t know. I don’t trade options.
Buying a VIX etf is not a good idea. These ETFs erode like crazy over the medium term. So you will lose money unless your timing is perfect.
Here’s VXX (1x VIX etf).

Here’s UVXY (2x VIX etf).

6 am: The NASDAQ is at 7000 (round number resistance).
This shouldn’t concern medium-term traders and investors. Round number resistances don’t work well in the stock market. Here’s the NASDAQ’s chart, overlapped with 7000, 6000, 5000, 4000, 3000, and 2000 resistances.

  1. The NASDAQ did not stop at all at 6000
  2. The NASDAQ made a significant correction after it reached 5000
  3. The NASDAQ didn’t stop at all at 4000
  4. The NASDAQ made a small correction after it reached 3000
  5. The NASDAQ made a small correction after it reached 2000.

Ignore the NASDAQ’s round # resistances.

Conclusion

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. 2018 will be much chopper than 2017. If you haven’t already, please read Are financial conditions “too easy”.

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.

12 comments add yours

  1. Hi Troy
    Thanks for sharing your analysis which makes a lot of sense to me. Of course, there is always the possiblilty of an unexpected event or shock which could lead to a more significant decline or lead even to a bear market. Either way, I am fine with a bull- and bear market (as I am in the accumulation phase, I prefer lower stock prices).
    Cheers

    • Shocks of that magnitude do not appear out of nowhere. There are always warning signs that investors and traders can pick up on if they keep their ears to the ground.
      Just my two cents
      Troy

  2. My daily rant:
    This market needs to have a correction already! It’s so hard to just be on the sideline and see all my 3X leveraged ETFs blow away.
    Suggestion:
    Can you please make a post on some of the books that you would recommend someone to read? There are so many resources out there, hard to figure out which ones would really help improve my handle on the finance industry.
    Personally, I’m interested in books that can help improve my understanding of technical indicators, along with hedging.
    As always, thank you for such a lovely post.

  3. Troy, I see u added to your s&p short and added a Dow etf long position. Did u add to the Es short as a hedge against your long day trades? Or does your day trading model see a pullback in the s&p?

  4. Ahmed, u can read all the books you want, the simple answer your looking for is patience & discipline. That’s it. If you are experiencing FOMO. (Fear of missing out) then trade very small size with stop losses. Otherwise patience is the only thing that reading 200 books will teach you.

  5. Troy, can you post a similiar blog post for the s&p as you did with the nasdaq? Example: how the s&p went through 2300, 2400, 2500, 2600 , 2700 with no pullback. Thank you again for this free research that NOBODY is taking for granted! God bless. Thank you

  6. Troy, do you use Fibonacci retracement levels on the s&p. I wanted to post a photo of a Fibonacci extension that has the s&p drawn from the last recent low of 2620 to the pre 2700 level @ 2698. So a Fibonacci retracement drawn from 2620 to 2698 with a -50% extentenion brings the es to 2737. Which is why I’m asking you why u shorted more es at 2725. I’m waiting for the 2737 level to put a short on. I only trade the s&p futures index. I guess u either see a imminent pullback or this is a hedge against your longs. Thank you

  7. Thank you Troy . Do you think there is any important factor that present in current market which was not common in the pass , like the big position on shot vol and also the increasing of passive ETF . Can those feedback loop can trigger a small correction to a significant one ?

    • I think the factors that you mention serve to make the market more extreme. Rallies are longer/fiercer, and so are corrections

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