Stock market on July 14, 2017: thoughts and outlook


*These are our short term discretionary thoughts on the market.  We’re looking at how the market reacts to news, earnings, and other fundamental themes. Our models determine our trades.
Go to our homepage for our latest market outlook.
*We update this webpage throughout the day.

Stock index & news

Topics discussed:

  1. U.S. economic growth is still solid despite “weak” Retail Sales
  2. Why bank stocks aren’t going up despite strong earnings reports
  3. Bitcoin is going to tank (eventually)
  4. The current rally is long, but not particularly big.

3 pm: U.S. economic growth is still solid
There were 2 key economic reports today:

  1. Industrial Production
  2. Retail Sales

Industrial Production increased by 0.4% in June. Solid growth.
Retail Sales ex-gas fell -0.1% in June. This confirms our medium-long term model: the current bull market in stocks and economic expansion have 2-3 years left.
In the final years of an economic expansion, year-over-year Retail Sales growth tends to decrease.

Over the next 2 years, we’ll start to see various economic indicators start to deteriorate a little. The minor deterioration will NOT be a bearish sign. It means that:

  1. The bull market still has room to run.
  2. The next bear market isn’t very far in the future (i.e. 2-3 years).

A lot of the S&P’s biggest historical gains happened in the final years of its bull markets. So there’s no reason to sit on the sidelines right now and wait for the next bear market.
3 pm: Why bank stocks aren’t going up despite strong earnings reports
U.S. banks released solid earnings today as expected.

  1. JPMorgan crushed earnings and sales expectations. Its stock is down -1%
  2. Wells Fargo beat earnings expectations. Its stock is down -1.2%.
  3. Citigroup beat earnings and revenue expectations. Its stock is down -0.5%.

If their earnings reports are all solid, why are bank stocks falling today? Is this a bearish sign i.e. “sell the news”?
No. The market’s short term reaction to earnings season tends to be pretty random. It doesn’t always go up on good earnings (it only goes up 60% of the time on “strong” earnings). For example, Q2 2016 earnings season (July 2016) was strong. The banks’ crushed it.  The finance sector was flat on the earnings season. The finance sector started to rally after the earnings season was over.

Hence, the stock market’s short term reaction to earnings reports doesn’t mean much. These strong reports are signs that the long term direction of the stock market is still bullish.
3 pm: Bitcoin will crater (eventually)
Bitcoin is falling again. It’s close to reaching a small support.

Bitcoin is clearly in a bubble. And like all exorbitant bubbles, Bitcoin will crater one day. HOWEVER, that doesn’t mean Bitcoin will crater right now. No one can consistently and accurately predict the exact tops for bubbles. You shouldn’t short bubbles because bubbles kill both longs and shorts.
A few weeks ago we said that “Bitcoin will never be a widely used currency”.

A currency must be a relatively stable store of value. The average Joe doesn’t want to hold a “currency” (i.e. Bitcoin) that can lose 20-30% of its value in 1 day. Can you imagine having $10,000 in your bank account and waking up tomorrow to find out that you only have $8,000 in your bank account?

Morgan Stanley released a scathing report yesterday: “Bitcoin acceptance is virtually zero and shrinking”. Last year, 5 of the top 500 online merchants accepted Bitcoin. This year, only 3 of the top 500 online merchants accepted Bitcoin. No sane company wants to accept a wildly fluctuating asset as payment.
5% of Bitcoin’s trading volume comes from perma-bears who think the world is going to end every day. The other 95% of trading volume comes from day traders who are playing a dangerous game of hot potatoes.
7 am: The current “small rally” is long, but not really big.
The S&P has been in a “small rally” since June 27, 2016. As we’ve mentioned before, this is one of the longest “small rallies” in history. Hence we think that the S&P will probably make a 6%+ “small correction” within the next 4 months.
However, the magnitude of this “small rally” isn’t particularly big. Since June 27, 2016, the S&P is up 23%. Out of the S&P’s 79 historical “small rallies” 17 had greater magnitudes than the current one. Some of these “small rallies” went up more than 40%!

  1. June 11, 2009: 43%.
  2. March 5, 2004: 47%
  3. February 13, 1996: 44%
  4. July 2, 1986: 41%
  5. September 23, 1980: 40%
  6. October 29, 1963: 43%

Since the magnitude of this “small rally” isn’t particularly outstanding, there is no euphoria in the U.S. stock market right now. This can be seen in the latest AAII sentiment survey, in which Bulls and Bears are BOTH pretty low.

Bottom line

Nothing has changed since our our July 13 bottom line.

  1. Our medium-long term model says that the U.S. stock market is still in a “big rally within a bull market”. There is no significant correction or bear market on the horizon. The optimal investment decision is to follow our medium-long term model and be 100% long stocks.
  2. We are sitting on 100% cash. Based on our Easy Trading model, the most risk-free and guaranteed part of the current “small rally” is over.
  3. We’re waiting for the next 6%+ small correction. Then we’ll shift into 100% long UPRO (3x S&P 500 ETF).
  4. Our portfolio is up 17% year-to-date.

Our medium-long term model’s value is 40 as of July 14, 2017. This is down from 42 last week. The model is updated daily. We post the model’s value here once every week.

Sectors

Energy
The energy sector was inline with the S&P today. Oil went up.
Here’s XLE (energy sector ETF). It’s bumping against its trendline resistance.

Here’s WTI oil.

Finance
The finance sector fell today because interest rates fell. There is a very strong intraday correlation between XLF (finance sector ETF) and interest rates.
Here’s XLF’s hourly bar chart.

Here’s the 10 year Treasury yield’s hourly bar chart.

Tech
The tech sector outperformed the S&P today. Nothing surprising. This is normal for a bull market.
Here’s XLK (tech ETF)

2 comments add yours

  1. Great blog! Do you have any books or sources you can recommend on the US stock market and its history?

    • There aren’t any great books. For sources, we went through the WSJ every day from 1950 to present. We basically created our own history

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