Stock market on June 30, 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 3 pm.

Stock index & news

Topics discussed:

  1. The possibility of a Trump trade war re-emerges.
  2. Stock market seasonality during the week of July 4.
  3. If the S&P makes a “small correction” right now, what is the bottom target?
  4. Pre-earnings season reports have been strong.

Trump’s potential trade war
Over the past few months, Trump’s advisors have strongly advised against a global trade war. And over the past few months, Trump has listened to his advisors. But with Trumpcare stalling in Congress and his pro-growth policies being put on hold, Trump is finally lashing out.
It’s like the mentality of a teenager. “You won’t pass my policies in Congress? You won’t let me be constructive? Fuck it. I’m going to pass something. Let’s do a trade war. Let’s be destructive.”
According to a report from Axios, Trump had a meeting with 24 Cabinet members and top government officials on Thursday. 22 were against a trade war while 3 supported it. Unfortunately, one of those 3 is Donald Trump.
The report said that a decision will be made in the “coming days”. The primary target will be Chinese steel exports. It may be extended to other goods.
Let’s assume that Trump does start a trade war. How will it impact the U.S. stock market?

  1. We don’t think there will be a massive global trade war. China really doesn’t want to start a trade war right now. The ruling Communist party is gearing up for a once-in-5-years meeting in October. President Xi Jinping is too busy playing internal politics to be focused on fighting a trade war with Trump.
  2. Many economists think that the U.S. will enter into a recession if Trump fights a trade war. We disagree. For starters, when was the last time the majority of economists were right about anything? They’re too pre-occupied with economic theory to focus on reality. In addition, this will not be an all-out trade war. Since it will be limited in scale, there will be no recession.
  3. Slapping tariffs on Chinese steel exports isn’t anything new. The EU did it. Obama did it. (The U.S. imposed a 266% duty on some Chinese steel imports under Obama – March 1, 2016.) The stock market didn’t tank when Obama announced steel tariffs.
  4. The markets aren’t reacting to this news at all. The S&P hasn’t gone down on this news. The U.S. dollar isn’t going up on this news.
  5. We don’t think a trade war will lead to a bear market or significant correction in U.S. equities. Our medium-long term S&P 500 model does not use political factors.
  6. Could the stock market make a “small correction” when Trump announces tariffs on Chinese steel? Maybe. Who knows. We will benefit from this scenario since we’re sitting on 100% cash and looking to buy UPRO (3x S&P ETF).

In other words, we think this problem will not get out of hand.
*Based on current estimates, Trump will announce steel tariffs in mid-July.
Stock market seasonality.
We don’t use seasonality in our trading/investment decisions. But it’s still an interesting factor to watch.

The stock market goes up 2/3 of the time during the week of July 4. But when the S&P has a strong rally in the first half of the year (i.e. is up more than 5%), the S&P goes up 83% of the time during the week of July 4.

Where will we buy stocks?
We still don’t know if the S&P’s small correction has begun. If you look at the S&P’s sectors, tech is the only major sector that’s falling right now.
If the small correction has begun, we will buy UPRO (3x S&P ETF) when the S&P reaches 2306. That is a 6% decline, which is one component of our definition for a “small correction.
The S&P’s 200 daily moving average is at 2292 right now and going up 1.5 points per day. It will be at 2300 soon. Our buying target (below 2306) confluences with this support level.

Earnings reports have been strong so far.
Q2 earnings season hasn’t started yet. It will be kicked off in mid-July by the banks. However, not all companies release their reports during the normal earnings season. A few major companies have pre-released their reports, and the overall trend is positive.

  1. Oracle beat earnings expectations.
  2. Adobe beat earnings expectations.
  3. Fedex beat earnings expectations. As an international transport company, FedEx is considered by many investors to be a bellweather for the global economy.
  4. Nike beat earnings expectations yesterday.

Pay particular attention to Nike. Nike’s U.S. sales have been flat for years so you can pretty much ignore U.S. sales. Nike experienced 2 years of sluggish sales growth outside of the U.S. This was early-2015 to early-2017, which coincided with a global economic slowdown (ex-U.S.). This quarter, Nike’s Chinese and emerging market sales spiked (up 11% quarter-over-quarter in China and up 21% in emerging markets).
This is another sign that the global economy continues to improve. 50% of the S&P 500’s revenues come from ex-U.S.. This is part of the reason why the S&P’s 12 month forward earnings expectations are growing so rapidly.

Bottom line

Nothing has changed since our our June 29 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).

Click below to find out our model’s value right now as of June 30, 2017. If you don’t have social media, feel free to contact us and we’ll email you with our model’s value.
Our model’s value is 39 as of June 30, 2017. This is unchanged from last week’s value.. The model is updated daily. We post the model’s value here once every week.
 

Leave a Comment