Stock market on July 5, 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. Last updated 4 pm.

Stock index & news

Topics discussed:

  1. The global economy continues to improve.
  2. A preview of Q2 2017 earnings season.
  3. U.S. economic data is no longer “missing” analysts’ expectations across the board.

Global economy
The real-time state of the economy leads the stock market. Various leading indicators demonstrate that the global economy is still growing at a healthy rate. Hence, the bull market in stocks isn’t over.
*Ignore lagging indicators like GDP and EXTREMELY leading indicators like Auto Sales. The best indicators lead recessions by a few months.
Here’s the Eurozone’s Manufacturing PMI. The EU’s economy is growing.

Here’s the U.S. ISM index (released yesterday). ISM continues to improve. Here’s ISM’s 20 year chart.

China’s economy is growing as well. The key manufacturing sector is strong. Here’s China’s Manufacturing PMI.

Most of the weakness in China’s economic data comes from the services sector. China’s Service PMI isn’t very useful because it swings wildly. See the following chart.

Q2 2017 earnings season
As usual, Q2 2017 earnings season will be comprised of 2 important waves:

  1. The banks report in mid-July.
  2. Major tech companies report in late-July.

Only tech and finance earnings are important enough to move the broad S&P 500. Here are the key dates:

  1. JP Morgan: Friday, July 14.
  2. Wells Fargo: Friday, July 14.
  3. Citigroup: Friday, July 14.
  4. Netflix: Monday, July 17
  5. Bank of America: Tuesday, July 18
  6. Goldman Sachs: Tuesday, July 18
  7. Microsoft: Thursday, July 20
  8. Google: Monday, July 24
  9. Apple: Tuesday, July 25
  10. Facebook: Wednesday, July 26
  11. Amazon: Thursday, July 27

Q2 2017 earnings will probably be strong. The S&P 500 doesn’t always go up on strong earnings. For example, Q2 2016 earnings season was strong but the S&P was flat.
But when a particular sector falls before an earnings season, there’s a high chance that it will go up on the earnings season.
The tech sector has fallen in the run-up to Q2’s earnings season. Hence, there’s a high chance that tech will rally in late-July. Here’s XLK (tech ETF).

23 out of 500 companies in the S&P have already released earnings for Q2. 18 of these 23 companies beat their earnings expectations.
U.S. economic data is no longer “missing” expectations across the board.
The majority of U.S. economic indicators have missed analysts’ expectations over the past few months. We said last week:

The U.S. economy is still growing decently. Our medium-long term model does not foresee a recession on the horizon. U.S. economic data is “missing expectations” right now simply because analysts have set their expectations too high post-Trump election. Once analysts set more realistic expectations, U.S. economic data will start to “beat expectations” again.

Over the past few days, U.S. economic data has become mixed. Although some economic indicators are still “missing expectations”, other indicators are beating expectations (e.g. this Monday’s ISM index).

We are not concerned about the U.S. economy right now. Some pessimists point to declining auto sales as a sign that the “U.S. economy is falling apart”. Yes, it’s true that auto sales peaked in 2016. But historically, auto sales can peak YEARS before recessions begin. Hence, Auto Sales is not useful as a timing indicator. Based on our medium-long term model, this economic expansion & bull market have at least 1-2 years left (2 years is more likely).
Here’s Lightweight Vehicle Sales: Autos and Light Trucks.

The tiny decline in auto sales has a negligible impact on U.S. GDP (-0.1% on year-over-year GDP growth).

Bottom line

Nothing has changed since our our July 3 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 on the horizon.
  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).

Sectors

The S&P’s sectors are rotating like crazy every few days. On some days, energy/finance massively outperform while tech underperforms. On other days, tech outperforms while energy/finance underperform.
Energy
The energy sector underperformed the S&P today because oil cratered.
Here’s XLE (energy ETF).

Here’s WTI oil.

Finance
After more than a week of strong gains, the 10 year yield was flat today. Hence, the financial sector underperformed (rising yields = higher bank profit margins).
Here’s the 10 year yield.

Here’s XLF (finance ETF).

Tech
Tech outperformed today after underperforming the S&P since early-June 2017. There’s nothing abnormal here.

Leave a Comment