*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
- Why every single stock market is going up.
- This is why you shouldn’t short “overvalued” stocks.
- Stock market investors should not be concerned about falling inflation.
- Seasonality has been effective this year.
4 pm: Why every single stock market is going up.
Year-to-date, every single stock market (except Russia’s) has gone up.
Over the medium-long term, a nation’s stock market follows its economy. Global economic growth continues to be strong right now, which is good for global stock markets in the medium-long term.
*Russia’s economy is the only one that’s sinking. Putin is driving Russia’s economy to the ground (political sanctions, etc).
You only need to pay attention to 3 countries when it comes to the global economy: U.S., China, and Germany. The U.S. is the world’s economic superpower, China drives emerging markets, and Germany drives Europe. These 3 sectors account for the bulk of global GDP.
China continues to grow
China’s year-over-year GDP growth rate clearly bottomed in mid-2016.
Manufacturing drives China’s economy. Hence China’s manufacturing indicators are the more useful than China’s service sector indicators.
Most of China’s manufacturing indicators improved last month.
Here’s New Orders
Here’s Industrial Production
Here’s China’s manufacturing PMI
Germany’s economy is strong as well. Like China, Germany relies on manufacturing. Almost all of Germany’s manufacturing indicators improved last month.
Here’s Germany’s manufacturing PMI
Here’s Germany’s Ifo Business Climate Index, which is Germany’s best leading indicator.
Here’s Germany’s Industrial Production, which is noisier but also trending higher.
Here’s Germany’s manufacturing production. Also trending higher.
We include several U.S. economic indicators in our medium-long term model. The U.S. economy is growing decently.
So in the last leg of this bull market (2-3 years according to our model), global stocks will probably rise together.
4 pm: This is why you shouldn’t short overvalued stocks
The latest news: hedge fund manager David Einhorn is getting killed on his FANG shorts.
- His argument for shorting these high-flying tech stocks: overvalued stocks should crash.
- We said that overvalued stocks tend to get more overvalued as long as the stock index’s bull market isn’t over.
- So yes, some of these tech stocks will collapse 50%, 60%, 70%+ in the next bear market. But not right now. This is still a bull market.
Einhorn’s mistake is nothing new. The book Hedgehogging mentioned a great short-seller from the 1970s-1980s called the “Prince of Blackness”. The Prince ran a short-only hedge fund that shorted fraudulent companies. The Prince made $200 million. On his last short, the Prince started to short a stock at $20. The stock ran up to $50, and the Prince was wiped out (forced to cover his shorts). Over the next few weeks, the stock ran up to $80. Then it crashed to $2 on news about the company’s fraudulent financial reports.
The market can stay irrational longer than you can stay solvent. Don’t short stocks. Your theoretical downside is infinite.
6 am: Investors shouldn’t be concerned about falling inflation
Inflation rose rapidly from late-2016 to early-2017. Since then, inflation has been falling.
Some concerned investors think this means that the bullish “Trump reflation” theme is dead.
In reality, the surge in inflation from late-2016 to early-2017 had nothing to do with Trump.
The year-over-year change in headline inflation is largely a function of the year-over-year change in oil prices, particularly when oil prices are swinging wildly.
Here is the 10 year U.S. inflation rate.
Here is the year-over-year change in oil (as a percent).
- Year-over-year change in oil fell from mid-2014 to mid-2015. Inflation fell from mid-2014 to mid-2015.
- Year-over-year change in oil slowly went up from mid-2015 to mid-2016. Inflation slowly went up from mid-2015 to mid-2016.
- Year-over-year change in oil surged from late-2016 to early-2017. Inflation also surged. This was to be expected because oil was extremely depressed in Q4 2015 to Q1 2016.
- Year-over-year change in oil fell from early-2017 to the present. Inflation fell from early-2017 to the present.
Oil is currently stuck in the $40-$50 range. Hence, the year-over-year change in oil is also flat, which means that the recent weakness in inflation is transitory.
In addition, falling inflation alone is not bearish for the stock market if other economic indicators are improving (which they are right now). For example, inflation fell in 2012 and grinded lower in 2013. The S&P went up during those 2 years.
6 am: Seasonality has worked out pretty well this year.
We don’t use seasonality in our models because it barely works more than 60% of the time. However, it’s interesting to note that the S&P 500 has followed its seasonality pretty well since Trump got elected.
- The S&P’s strongest gains occurred from November 2016 to May 2017. Those are also the strongest months in terms of seasonality.
- We said in early-June that late-June is seasonally weak. Based on our study: the S&P would either fall in late-June or swing sideways (it wouldn’t rise). This June, the S&P consolidated.
- Seasonality is strong from mid-late July because of Q2 earnings season. The S&P is indeed going up this July.
Nothing has changed since our our July 14 bottom line.
- 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.
- 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.
- We’re waiting for the next 6%+ small correction. Then we’ll shift into 100% long UPRO (3x S&P 500 ETF).
- Our portfolio is up 17% year-to-date.
Today was a quiet day in the sectors. The only notable thing is finance. The financial sector is falling and underperforming the S&P on strong earnings.
Here’s XLF (finance ETF).
We thought the financial sector would use Q2 earnings to breakout from its resistance. Looks like we were wrong. If this pattern continues, then perhaps the tech sector will fall after its Q2 earnings reports (in late-July). Who knows. The short term is unpredictable.