Stock market on July 19, 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

  1. VIX is extremely compressed
  2. NASDAQ is up 9 days in a row. Not a bearish sign.
  3. The so-called “euphoria” in tech stocks.
  4. It’s a “quiet year”. Quiet years are good for stocks.

*Read our post Will commercial and auto loan problems hurt the U.S. stock market. The post is too long, so we published it separately today.
4 pm: VIX is extremely compressed
VIX has closed below $10 for 5 days in a row. This is a record in VIX’s short history (started in 1990).
Like we said last week, these compressions are usually followed by a spike in VIX and a very quick decline in the S&P. However, VIX’s spike will limit the S&P’s downside, which means that the S&P will make a 6%+ small correction at most. There will be no significant correction.
*VIX is not a good timing indicator for corrections.
The S&P rarely begins a correction during earnings season (e.g. right now). So we’ll have to at least wait until August before the S&P can start a correction.
4 pm: NASDAQ is up 9 days in a row
The NASDAQ has gone up 9 days in a row. This sounds like a bearish factor, but it isn’t. It’s an irrelevant factor. The NASDAQ just needs to fall 1 point tomorrow for this “bearish pattern” to be broken.

And historically, the NASDAQ’s future returns were better than random when it went up 9 days in a row. So ignore this factor.

6 am: the “euphoria” in tech stocks
With the rally in FANG and tech stocks, the financial media continues with its comparisons of 2017 to 1999. (We said that 2017 is more like the late-1960s). Here’s an interesting statistic:

There were more than 500 IPO’s in 1999, most of them tech stocks. The average first-day gain was 68%, and 10 soared more than 350% on their first day.

Here’s a look a the dismal state of tech IPO’s today. This is Snapchat since its IPO.

Here’s Blue Apron since its IPO.

So much for “euphoria” in the tech sector.
6 am: It’s a “quiet year”
I read Paul Krugman’s blog. He’s a good economist. He was ringing alarm bells in 2005-2006, so it’s safe to say that he’s at the forefront of any major problems the U.S. economy is facing right now.
Look at his blog today.

Literally every single article is devoted to the anti-Trump movement. In other words, he has nothing bad to say about the U.S. economy right now. Sure, there are some small problems (e.g. Toronto home prices are cratering, U.S. auto sales are struggling). But there are always some small problems. The world will never be perfect. Focus on big problems and not small problems.
In our historical studies, we’ve noticed that the stock market is usually in a “big rally within a bull market” (as defined by our medium-long term model) when the financial media is quiet. When there is no CONSISTENT bearish theme for the media to reiterate, there can be no significant correction or bear market ahead. And the financial media is indeed quiet right now. Zerohedge (permabear site) is stuck with writing about “the evil government is blah blah blah”, while mainstream media like CNBC has nothing to better to talk about than Trump, geopolitical “worries” in the South China Sea (that’s been going on forever), and Game of Thrones. I feel bad for financial journalists. They must be bored out of their minds.
The stock market’s “quietness” can be noted in VIX, which is extremely low.

VIX is a sign that the stock market will make a correction, but no one knows when. VIX is a terrible timing indicator. This is how we think the next small correction will play out.
But as we’ve mentioned before (here and here), low volatility (VIX) and strong momentum (in the S&P 500) is actually a medium-long term bullish sign. It means that the next significant correction or bear market is still far away.

Bottom line

Nothing has changed since our our July 18 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 have been sitting on 100% cash since May 13. Prior to that we were 100% long UPRO. 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.

Sectors

Energy
The energy sector outperformed the S&P today because WTI oil went up.
Here’s XLE (energy sector ETF). Notice how XLE is starting to breakout from its downtrend. These breakouts usually take some time. Don’t expect XLE to skyrocket.

Here’s WTI oil

Finance
The financial sector underperformed the S&P. The financial sector has underperformed the S&P since this earnings season began last week.
Here’s XLF (finance ETF)

Tech
The tech sector led the S&P’s advance today. Perfectly normal. Here’s XLK (tech ETF), at its previous high.
 

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