Stock market on June 28, 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 throughout the day. Last updated 4pm.

Stock index & news

Topics discussed:

  1. High yields are rising. Stock market investors should not be concerned.
  2. If the S&P makes a small correction right now, when will it bottom?
  3. The U.S. dollar’s bear market.

Stock market investors should ignore high yields right now.
There have been headlines in the financial media recently about high yield bonds:

High yields are rising! This is just like 2015 when high yields jumped, which led to a significant correction in the U.S. stock market.

Yes, it’s true that high yields have been rising. But the  recent increase is tiny, and is nothing like the surge in high yields that preceded the August 2015 significant correction. Hence, medium-long term bull investors should not be concerned about this “bearish” factor. Ignore it for now.
Here’s Merill Lynch’s U.S. High Yield CCC or Below Effective Yield.

High yields have risen a little recently because oil prices have fallen, dragging down energy stocks. (A lot of high yield bonds are issued by energy companies.) When energy stocks stop falling, high yields will stop rising. Since we don’t think energy stocks have a lot of room left to fall, the problem in the high yields sector is contained.
If this is a small correction, when will the S&P bottom?
As we demonstrated in a historical study today, the S&P is probably in a “small correction” right now. The probability is 5/6.
If the S&P makes a small correction right now, it will probably bottom during Q2 2017 earnings season from mid-late July. Here’s why.

  1. Q2 2017 earnings season will probably be strong.
  2. The S&P doesn’t always go up on a strong earnings season. Sometimes it is flat or falls on a strong earnings season!
  3. But when the S&P is falling before an earnings season, it tends to rally on the earnings season. Historically, a lot of small corrections bottomed during earnings season, regardless of whether that earnings season was strong or weak.

Here are 2 very recent examples.
 
 


U.S. dollar bear market.
We only trade/invest in the U.S. stock market, so we don’t have a good understanding of currencies. However, our sister fund trades gold/silver and currencies. They think that the U.S. dollar is in a bear market.

  1. Historically, money flow caused the U.S. dollar’s bull and bear markets.
  2. When money flowed strongly to the U.S., the U.S. dollar soared (e.g. 2014-2015). When money flowed away from the U.S. to emerging markets or Europe, the U.S. dollar tanked (e.g. 1985-1990, 2002-2007).
  3. The European and Chinese economies are recovering from a multi-year slump. Money is now flowing out of the U.S. Meanwhile, monetary policy is on the path towards tightening around the world.
  4. The U.S. dollar is no longer going up on any Federal Reserve rate hike news. Dovish news from the ECB hasn’t been able to push the Euro down anymore.
  5. As seen on yesterday’s Mario Draghi speech, any hint of hawkishness from the ECB will push the Euro up.
  6. Investors and traders know that the ECB will inevitably have to raise rates. It’s not a question of “if”. It’s only a question of “when”.

Historical bear markets in the U.S. dollar have been fierce. Once the bear markets got going, the U.S. dollar found little support on the way down.

The U.S. dollar’s main support is at 92. Our sister fund thinks that once the U.S. dollar breaks that support level, it will be in freefall.

Our fund cares about the U.S. dollar only to the extent that it impacts the U.S. stock market. As we explained in a previous post, the U.S. dollar’s decline will start to give U.S. corporate earnings a boost by Q4 2017. (A falling USD boosts U.S. corporate earnings because 50% of U.S. corporate revenues come from overseas).

Bottom line

Since our June 27 bottom line, it’s become increasingly likely that this is the “small correction” we’ve been waiting for. Or maybe not. Patience.

  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

Everything went up today, and the tech sector outperformed. This was not surprising.
Energy
The energy sector underperformed the S&P today, despite rising oil prices.
Here’s XLE (energy ETF).

Here’s WTI oil.

Finance
The finance sector outperformed the S&P today because interest rates went up again. Rising interest rates = widening financial profit margins.
Here’s XLF (finance ETF).

Here’s the 10 year yield.

Tech
The tech sector outperformed today. Nothing surprising. Tech tends to magnify changes in the S&P.
Here’s XLK (tech ETF).

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