Stock market on March 1, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.

Thoughts

  1. Initial claims: a medium-long term bullish sign for the economy and stock market.
  2. The stock market is using Trump’s tariffs as an excuse to make a pullback
  3. 3% on the 10 year Treasury yield isn’t going to “cause stocks to crash”.
  4. March-April are seasonally bullish for stocks.

Read Study: prepare for a significant correction or bear market beginning in 2019.
2 pm. Initial Claims: a medium-long term bullish sign for the stock market and economy.
Initial Claims came out today, and claims fell to the lowest level in this economic expansion. This means that the U.S. economy continues to grow at a healthy pace.


This is an important medium-long term bullish sign for the U.S. stock market. Historically, Initial Claims rise significantly before an equities bear market or recession begins. Initial Claims making new lows implies that the start of the next bear market is AT LEAST months away.
It’s also important to remember that Initial Claims are very low right now. Hence, we are watching out for signs of a sustained increase in Initial Claims. This is not a concern right now, but we’re on watch.

2 pm: the stock market is using Trump’s tariffs as an excuse to make a pullback
Contrary to what the media would tell you, Trump’s tariffs on steel and aluminimum today ARE NOT a surprise. It was expected a few days ago. I wrote yesterday:

This is not the start of a full-blown trade war between the U.S. and China. These small-scale tariffs happen all the time. Trump is not unique in imposing tariffs on Chinese goods.
Obama did it too.

  1. Obama slapped tariffs on Chinese tires in 2009.
  2. Obama slapped tariffs on Chinese solar panels in 2014.
  3. Obama slapped tariffs on Chinese steel in 2016.

China responds to these small-scale tariffs with equally-small tariffs. China is a net exporter to the U.S. while the U.S. is a net importer. China does not want a tariff war to get out of control. China stands to lose much more than the U.S. in the event of a trade war.

I don’t expect Trump’s steel and aluminimum tariffs to result in an all-out global trade war. The stock market is using this news as an EXCUSE/TRIGGER to make a standard post-correction pullback. Most 10%+ “small corrections” bottom, rally, and then make a pullback before making new highs (see study).
3 am: 3% on the 10 year Treasury yield isn’t going to “cause stocks to crash”.
Some investors expect the stock market to crash when the 10 year Treasury yield crosses above 3%. 3% is the 10 year yield”s previous high. Bears argue that a breakout above this resistance = interest rates will surge = stocks will crash.

This argument is flawed on multiple levels.

  1. 3% is not a “magic number” that everyone is watching. If you look at the 10 year yield’s chart, you’ll notice that interest rates change slowly. They don’t surge or crash after breaking out or breaking down from a prior support/resistance.
  2. The 10 year yield is already at 2.9%. The difference between 2.9% and 3% is a mere 0.1%, which is chicken scratch. If a 0.1% rise in rates can cause a “stock market crash”, then I guess the stock market should be crashing all the time.
  3. Fundamentals are MUCH MORE important than technical support/resistances in the bond market. Technicals are important in markets that are dominated by short term traders. Fundamentals are important in markets dominated by large institutional investors (e.g. bond markets). Large institutional investors care about fundamentals > technicals. Big pension funds aren’t going to do a 180 degree flip on bonds just because yields crossed the “magic 3% number”. Large funds don’t trade on technicals because they can’t get in and out of the market fast enough. It’s hard to move hundreds of billions of dollars around. Traders are a tiny force in the bond market.

If you haven’t done so already, please read Study: when will rising interest rates hurt stocks?
3 am: March- April are seasonally bullish for stocks
From a seasonality perspective, March-April are the 2 strongest months for the first half of each year.

This is a medium term bullish factor for the stock market right now. So although a short term pullback is possible, the bigger picture is still bullish.
Read Stock market on February 28: outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
  2. The S&P 500 has approximately 2 years left in this bull market.

I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.
I have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.

2 comments add yours

  1. How far of a pullback are u predicting? Do u think we retest the 200dma, go below the 200dma. We are off to the races from here back to new highs ?

    • Hard to say. The pullback’s minimum target has been met. Max target is marginal new low (i.e. close below 200sma). If I had to guess the odds, I think the odds of a new low are 20%, retest are 20%, and no retest are 60%.

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