Stock market on January 8, 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 and the S&P have gone up together for the second day in a row!
  2. The U.S. economy is still strong. Long term bullish for the U.S. stock market.
  3. Margin debt as a % of GDP is rising. Not a long term concern.

4 pm: VIX and the S&P went up together for the second day in a row.
I said on Friday:

VIX and the S&P went up together today. Normally VIX and the S&P move inversely. This is not a short-medium term bearish sign unless it persists.

VIX and the S&P went up together today (2nd day in a row). This is now a potential bearish sign. Give it a few more days.


6 am: the U.S. economy is still strong. There’s nothing wrong with the bull market in stocks and the economic expansion.
The U.S. economy and stock market move together over the long term. The bull market will not end if the economy doesn’t deteriorate. And right now, there’s nothing wrong with the U.S. economy. Let’s take a look at the major economic indicators.
The U.S. unemployment rate continues to fall.

U.S. inflation is stabilizing at 2%. I expect inflation to pick up in the second half of 2018.

The ISM Manufacturing PMI is trending higher.

U.S. Industrial Production is trending higher, just like the manufacturing PMI.

Retail Sales growth is also up. Growth tends to fall before a recession and bear market. This is clearly not the case right now.

Auto sales in the U.S. are ok, despite all the talk about declining auto sales in 2017. Auto sales can plateau or fall for YEARS before a bear market and recession begin.

New Home Sales are surging.

Since the U.S. economy is ok, investors and traders shouldn’t be worried about a bear market in equities. Our Medium-Long Term Model confirms this.
6 am: Margin debt as a % of GDP is rising. This is not a long term concern.
Real margin debt as a % of real GDP is rising to new all-time highs.

This chart looks chart, doesn’t it? Margin debt now exceeds the previous highs before the stock market topped in 2000 and 2007. This chart implies that a bear market is right in front of is.
Investors and traders shouldn’t be too concerned. Examine the vertical axis. From 2008-present, Real Margin Debt as a % of GDP went from 1.5% to 3%. This is hardly “excessive” or “crash-inducing”. It’s not as if margin debt was 10% or 20%, which would be worrisome. Over the long run, margin debt and the S&P 500 will forever move in sync. (Investors & traders like to maintain a steady long-term margin-to-cash buying ratio).
This indicator is pretty useless for picking bull market tops. The long term average for Real Margin Debt as a % of the S&P 500 has been significantly higher since 1995. It has not come down to pre-1995 levels. So anyone who used this indicator to invest in stocks would have been in 100% cash since 1995, while the S&P 500 has soared over the past 22 years.

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.

9 comments add yours

  1. Troy,
    They said the average stock price in 2006 was $50 vs $107 today on cnbc. Further validating my theory of the s&p needing to double from 2016 s&p was at 1515 which would validate a current s&p price target of 3,000
    When u get a chance can you backtest how often in how many years on average the s&p index doubles in price? If it is a ten year period where s&p was trading at 1515 pre crisis 2007 levels then it would validate a current s&p price of 3,000.

    • Oh that’s easy. Just divide the S&P today by the S&P in 1950. Then square root that to ^1/58. That’s the S&P’s average annual gain. Once you know the average annual gain, you can calculate how many years it takes for the S&P to double.

  2. Troy, you stated in an earlier post about corporate tax repatriation might make earnings not so great,
    *Analysts/strategists are calling for double digit (11.6%) growth y/y for the 4th qtr….and that IS priced in….so if companies do not perform and they start to MISS then the mkt is surely vulnerable….(I do not think that they will miss at all – just sayin) – but for the mkt to push higher from here – the guidance also has to be in line with the EXPECTED double digit growth rate for 2018 and as I told you earlier – all of the big investment banks are RAISING 2018 growth rates in light of the tax bill and the benefits that so many companies expect to reap. I suspect that we will hear nothing but glowing remarks over what the future holds….
    And it is the start of the qtrly beauty pageant………. Earnings this week include – DAL, JPM, WFC, Blackrock – but we will have to wait until Friday for the real action to begin.
    *. So do u think the repatriation is what will surprise these markets starting Friday with jpm. Vs analysts not considering this into there earnings?

    • No, I think the analysts have baked reptriations into expectations. And even if they haven’t, companies will break down the numbers in their earnings report.

  3. Thank you Troy, I am a great with putting ideas together but lack the compatibility of doing research. Not good with organizing it or being able to get the correct inflormation.

    • Hi Vincent,
      I only read Jeremy Grantham’s writings. His colleagues are decent, but nowhere near his level.
      And the model was originally influenced by his ideas, but over the years it evolved a lot. I don’t like the way GMO uses a 7 year outlook. It makes no sense. E.g. “over the next 7 years, the market will be flat”. But what if the market soars 100% and then falls 50%? I’d rather pick tops and bottoms. 7 years is too long a time frame.

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