Stock market on January 5, 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. VIX went up even though the stock market went up today.
  2. The S&P 500 futures’ momentum is very high.
  3. Investment grade credit spreads are falling. This is a medium-long term bullish sign.
  4. Delinquency rates on loans are going up. Is this a long term problem for the U.S. economy?

2 pm: VIX is up while the stock market is up
As of 2:13 pm, the S&P is up 0.4% while VIX is up 1.95%! This is an uncommon phenomenon because:

  1. The S&P and VIX usually move inversely
  2. Even if the S&P and VIX move in the same direction, VIX doesn’t normally jump when the S&P jumps.

Some traders think that this is a bearish sign for the U.S. stock market. I disagree.

  1. Yes, it’s true that VIX sometimes leads the S&P into a correction. Some corrections begin when VIX is rising while the S&P is rising.
  2. But there are too many false signals. I wouldn’t read too much into this unless the S&P and VIX go up together for several days in a row. That would be a worrisome sign. A one-time occurrence is not worrisome.

And keep in mind that VIX is literally at an all-time low. A tiny bounce off its all-time low is normal. Here’s VIX’s daily bar chart.

9 am: the S&P 500’s futures momentum is very high. 
On the surface, this seems like a short term bearish sign. It isn’t. It’s an irrelevant sign. Insanely short term overbought momentum can be washed out, followed by new highs.
Here’s the hourly RSI 14. Notice how it remains elevated.

Here’s the 4 hour RSI. It is also very overbought. But notice that the S&P doesn’t have to fall. It can merely consolidate sideways before going higher.

The Dow and NASDAQ paint similar pictures.


6 am: Investment grade credit spreads are falling. This is a medium-long term bullish sign.
The bond and credit markets often lead the stock market. Spreads tend to widen before the U.S. stock market makes a bear market or significant correction.

Investment grade credit spreads are falling right now. This means that low-risk corporate borrowers are healthy. High Yield spreads are completely flat. Like Investment grade credit spreads, High Yield spreads tend to widen before bear markets and significant corrections.

Falling Investment Grade spreads and flat High Yield spreads are medium-long term bullish signs for the U.S. stock market.
6 am: Delinquency rates on loans are going up. Is this a long term problem for the U.S. economy?
Bears frequently cry “delinquency rates on loans (credit cards, auto loans etc) are going up! This is an early warning sign for a recession!”
They are wrong.
Here’s the delinquency rate on Commercial and Industrial Loans. This delinquency rate went up before the past 3 recessions. It is going down today.

Here are the delinquency rates on Credit Card Loans and Consumer Loans. Yes, these delinquency rates are going up. But they’re going up from extremely low historical levels. So some mean-reversion is to be expected.


“Delinquency Rate on All Loans” is the most important of these indicators. It most accurately reflects the state of the commercial & individual credit markets. This delinquency rate went up before the last 3 recessions. It is going down today. This is a medium-long term bullish sign for the U.S. stock market and economy.

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. 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.
 
 

5 comments add yours

  1. Thank you Troy for your hard works , producing 2-3 post every day is not an easy task .

  2. I think next correction will occur between late january and mid march
    10~15% decline?

    • If I had to guess, probably under 10%. But like I said, that’s just a guess. 6% is minimum

Leave a Comment