Stock market on July 7, 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. Global employment growth is decent.
  2. There is no euphoria in the stock market.
  3. Tech’s recent beating is normal.

Global jobs growth.
Today’s Employment Report was strong. Employment growth beat expectations, April/May were revised up, and wage growth ticked up. The unemployment rate ticked up a little, but that’s due to an increase in the labor force participation rate (which is a good thing).
I’ve been seeing this headline a lot today:
“This is the longest historical streak of consecutive monthly jobs growth. 81 consecutive months since October 2010, beating the 1990s”.
Headlines like these sound scary, but are completely irrelevant. All you need is 1 month of negative growth, and the “consecutive monthly jobs growth” streak is over.
The primary reason for this record streak is because the BLS has gotten at measuring labor changes in the economy. They’ve gotten better at filtering out statistical noise. Throughout the 1990s, there were some months in which employment growth was negative, even though jobs growth averaged 250k that year (1997). Focus on the trend, not the individual data points.

But make no mistake – we are in the final 2-3 years of the current economic expansion.  (Our medium-long term model agrees.) The average jobs growth per month is coming down.

  1. 2014: average 250k per month.
  2. 2015: average 226k per month.
  3. 2016: average 187k per month.
  4. year-to-date 2017: average 180k per month.

This slowdown is completely normal for the final few years of every economic expansion.

It’s not just the U.S. that’s experiencing decent employment gains. Canada is too! This is the first time since 2010 in which all of the world’s key economies are growing in sync. Canada’s employment growth beat expectations today by a wide margin (45.3k vs 10k expected).
No euphoria.
Focus on data and not “feelings”. Based on the AAII sentiment survey yesterday, bullish sentiment is still low! Stock market investors aren’t euphoric.

Investors shouldn’t be too concerned about falling tech stocks.
After a massive rally from January-May 2017, high flying tech stocks have taken a beating.
Here’s Amazon.

Here’s Tesla.

Here’s Netflix.

Here’s Apple.

Here’s Google.

As long as the U.S. stock market is still in a bull market, these high volatility tech stocks will recover. Our medium-long term model states that this is still a bull market. People forget that from 1995-1999, high flying tech stocks like Yahoo had many large corrections on the way up.
Overvalued stocks become more overvalued as long as the S&P 500’s bull market is intact.

Bottom line

Nothing has changed since our our July 6 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).

Our model’s value is 42 as of July 7, 2017. The model is updated daily. We post the model’s value here once every week.
 

Sectors

The S&P 500’s sector rotation continues. After underperforming over the past week, tech led the S&P’s rally today.
Energy sector
The energy sector fell today because oil got crushed. XLE (energy sector ETF) is still firmly stuck in its downwards sloping channel.
Here’s XLE.

Here’s WTI oil. Oil has retraced 61.8% of its June 21 – July 4 bounce.

Finance
The financial sector was in line with the S&P today (interest rates went up). Finance is close to making a new high since March 2017.
Here’s XLF (finance ETF).

Here’s the 10 year Treasury yield.

Here’s the 2 year yield.

Tech
Tech outperformed the S&P today. Nothing abnormal. Here’s XLK (tech ETF).

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