Stock market on January 9, 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. The S&P 500 and VIX are going up together for the 3rd day in a row!
  2. All of the world’s major stock markets are insanely overbought.
  3. Inflation will rise in 2018. This is a medium-long term bullish factor for the stock market.

Read Sentiment is very high: bullish for the stock market
4 pm: The stock market and VIX are going up together. 3rd day in a row!
Yesterday I wrote: 

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.

The S&P and VIX went up together today (CLOSE vs previous day’s CLOSE). This is the third day in a row.


Based on my first impression, this is a rather unusual sign. VIX and the S&P can move in the same direction, but here’s what’s unusual:

  1. The magnitude of their respective movements. The S&P is up 8 points while VIX is up more than 1%!
  2. The persistency of this correlation (3 days in a row).

This unusual correlation could be a short-medium term bearish sign. I’ll publish a study on this tomorrow morning.
8 am: All the major stock markets are insanely overbought
All of the world’s major stock markets (including the U.S. and emerging markets) are insanely overbought on a long term chart (monthly bar chart). Here’s the MSCI World Equity Index.

This seems bearish, but it isn’t. When monthly RSI is this overbought, the stock market tends to follow this pattern:

A small correction within the next 2-3 months, followed by a big rally to new highs.

I continue to emphasize this point. When sentiment and momentum are EXTREMELY high, they are no longer bearish signs. They’re long term bullish signs with the possibility of short term weakness.
7 am: Inflation will rise in 2018.
Inflation expectations are trending higher.

Meanwhile, the actual inflation rate is flat.

I agree with inflation expectations: the U.S. inflation rate should rise in 2018.
The inflation rate is heavily impacted by the year-over-year change in oil. Inflation will go higher as oil prices slowly rise over the long term (i.e. >6 months).

Yes, oil will probably make a short term pullback/correction because it is very overbought on a weekly bar chart. But it’s the year-over-year change in oil that impacts inflation. Oil prices fell during the first half of 2017. So as long as oil’s upcoming pullback/correction isn’t massive, the year-over-year change in oil will still go higher. This will push the inflation rate higher.
Inflation is bullish for the stock market in the long run, until we get to hyper inflation. Inflation pushes up the nominal value of stocks and their underlying assets.

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.

3 comments add yours

  1. Hello Troy
    I dare to forecast US stock markets of this year
    I think it will make a double top ( June and October ) or
    a triple top ( June and August and October = head and shoulders )
    By the way
    I trade only nikkei future and nikkei options
    If possible could you please forecast nikkei future ?

    • Hi yokohama.
      I can’t forecast the Nikkei’s future. I don’t know even about Japan or the Japanese stock market.

Leave a Comment