Stock market on July 20, 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. Trump is good for Corporate America, with or without his pro-growth policies
  2. The U.S. jobs quit rate is going up. This is good for stocks.
  3. The energy sector’s breakout is going to take some time.

5 pm: Trump is good for Corporate America
Now that Trumpcare is dead and most of Trump’s potential pro-growth policies are dead, some people think the U.S. stock market should fall. We disagree.

  1. The U.S. stock market is completely ignoring politics (as it should). The stock market is going up because A) the U.S. economy is growing at a decent pace and B) U.S. corporate earnings are growing as well.
  2. Some people forget that Trump is good for Corporate America even if he does nothing (as long as he doesn’t start a trade war, which he hasn’t).

There were 2 key economic data this week. Both of them were solid (Housing Starts and Initial Claims).
Here’s Housing Starts. Trending higher

Here’s Initial Jobless Claims. Trending lower

Regardless of your politics, Trump is more Corporate friendly than Obama. This is a point that David Tepper mentioned in January. Tepper said “the moment Trump was elected, it was guaranteed that the federal government wouldn’t put a single new regulation into place”. Of course Tepper was exaggerating, but his words were true.
Corporate America (especially small-medium sized businesses) was really hurting under the strain of nonstop regulations from Obama. Based on the latest CNBC report, Trump has stopped hundreds of potential regulations dead in their tracks.

  • Federal agencies have withdrawn 469 proposed regulations compared to a fall 2016 report when Barack Obama was president.
  • This includes 19 regulations with an economic impact of $100 million or more.
  • Another 391 regulations have been delayed for further evaluation and consideration.

5 am: U.S. jobs quits going up = good for stocks
A few weeks ago we said “growth in nonfarm private payrolls must fall significantly before an economic expansion and bull market can end”. Here were some historical examples.
Bear market began in October 2007:

Bear market began in March 2000:

Significant correction began in July 1990.

Growth in private payrolls has fallen since 2015.

Does this mean that a recession or bear market is imminent today? No. We’ve started to look at a new indicator. Quits: Total Private. This indicator = the percentage of workers who are voluntarily quitting. The idea behind this indicator is simple and logical.

When the economy is growing at healthy pace and the jobs market is hot, more people can quit their jobs because there are better options elsewhere. Hence, a rising “quit percentage” means that the jobs market is healthy and economic growth is solid.

We don’t use this indicator in our model because the data is too limited. But the rationale behind this indicator is logical, so we’ll continue to monitor it. It’s a sign that a recession (and bear market) is not imminent in 2017 or 2018.

You can see that the Quits percentage fell from 2005-2007, 2 years before the previous bear market began (leading indicator). Today, the quits percentage is rising. So the labor market is healthy and a recession is not imminent.
But you can also see that the quits percentage is rather high. This fits with our medium-long term model‘s belief that the current bull market has 2-3 years left.
5 am: the energy sector’s breakout is going to take some time.
In yesterday’s post we mentioned that the energy sector is starting to breakout from its downtrend. Here’s XLE (energy sector ETF).

Some investors expect XLE to surge towards $70+. We disagree. We think they’re too optimistic. These sort of breakouts usually take some time (i.e. a few weeks). It’s likely that XLE will go up a little more, retest its prior resistance trendline, and then make a wide bottom. We think a V-shaped bottom is unlikely.
In addition, oil might make a small pullback soon. Who knows. Since oil and the energy sector have a moderate day-to-day correlation, we can expect that an oil pullback will temporarily halt XLE’s rally.
Here’s WTI oil, at a resistance level.

So unless oil surges nonstop to e.g. $55, XLE will make a complicated bottom. Perhaps a W-shaped bottom? Who knows.
*We don’t trade individual sectors. We only trade the S&P 500. So take our sector-related thoughts with a grain of salt. We could very well be wrong.

Bottom line

Nothing has changed since our our July 19 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.

4 comments add yours

  1. So I am again perplexed by your 100% cash! If you know that the market is going to be in bully rally, why no be in the markets?

    • High chance of 6%+ small correction.
      1. if you ignore all small corrections, you actually maximize your returns. B/c the S&P might very well go up 8% before it falls 6%. (you’ll be forced to buy back at higher price)
      2. When I was younger and had less money, I would be seeking to maximize my returns
      3. but based on where I am in life today, I’m looking to reduce some volatility in my portfolio was well. my fund is only trying to catch the most risk-free part. that way we won’t sit through a e.g. 8% decline with 100% UPRO

  2. I agree that Trumps protectionism ideology, or the perception that he is, is overblown. I just don’t see it happening. The rhetoric and actions aren’t matching up. I see this market continuing to do well. Thanks for sharing!

    • People tend to exaggerate the power of the president. In reality, the system of checks and balances does a good job at keeping a president in line.

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