Stock market on March 2, 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. The stock market pullback’s minimum target has been met.
  2. George Bush’s tariffs didn’t cause the stock market to fall in 2002
  3. VIX is once again in backwardation. This is a medium term bullish sign for the stock market.
  4. Fears of a Trump trade war are overblown. This is not going to cause a bear market in stocks.
  5. ISM Manufacturing: medium-long term bullish sign for the U.S. stock market.

Read Investors should focus on the medium-long term instead of the short term
4 pm: the stock market pullback’s minimum target has been met.
I said that a pullback was likely from a statistical probability point of view. The S&P 500 made this pullback and has retraced more than 50% of its bounce.

A 38.2%-50% retracement is the minimum requirement for a pullback, and this requirement has been met. The medium-long term has been decisively bullish since 3 weeks ago, and now the short term is starting to turn bullish too.
Maximum downside risk is that we get a retest or marginal new low vs 2531. This is the short term bearish case that many analysts are calling for. I think the odds of this case are <50%.
3 pm: George Bush’s tariffs didn’t cause the stock market to fall in 2002
Bush placed a tariff on imported steel on March 5, 2002. The stock market continued to fall after that.

The bears are attributing the subsequent stock market decline to Bush’s steel tariffs. This isn’t true. For those who remember, the March-July 2002 selloff was all about corporate accounting scandals (Worldcom, Enron, etc). It had little to do with Bush’s steel tariffs.
Hence, the whole “tariffs will cause a bear market in stocks” argument confuses correlation and coincidence with causation. Bush’s tariffs certainly didn’t do the economy and stock market any good, but its impact was not significant compared to other issues like across-the-board corporate accounting scandals.
3 am: VIX is once again in backwardation
“Backwardation” is when near-term futures contracts are more expensive than far-off futures contracts. Backwardation = the futures curve slopes down from left to right. VIX is almost completely in backwardation.

This means that the stock market’s short term downside is limited, even if the stock market pulls back more. VIX is rarely in backwardation. Backwardation is a medium term bullish sign for the stock market.
See the black line in the following chart.

3 am: Fears of a Trump trade war are overblown. This is not going to cause a bear market in stocks.
I said yesterday that the stock market is using news of a Trump tariff as an EXCUSE to make a technical pullback. I stand by that view.
Business Insider published a good article about the immediate reactions to Trump’s trade war. Don’t focus on Business Insider’s headline; it’s meant to attracts clicks via fear-mongering. Focus on the content.

The EU is looking into taxes on imports of bourbon, orange juice, motorcycles, and other agricultural products as retaliation.
Canada’s foreign minister said “We will always stand up to Canadian workers and Canadian businesses. Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers.”
The UK, meanwhile, took a more cautious approach in its response while expressing concern.
“We are engaging with the US on what this announcement means in practice. “Overcapacity remains a significant global issue and we believe multilateral action is the only way to resolve it in all parties’ interests.”
In addition to the US’s allies, China is said to be considering retaliatory measures, including tariffs on imports of soybeans from the US, which totaled over $12.4 billion last year.
The Financial Times reported that Mexico was prepared to strike back as well unless Trump exempted it. According to Mexican data, the country imported nearly $4.5 billion of US steel while sending $3.6 billion back across the border.

Like I said yesterday, Trump has launched a small-scale tariff. This is not a full-blown attack from the U.S. Other countries are planning to retaliate with equally small-scale tariffs (e.g. against soy beans, orange juice, bourbon – these are all tiny industries compared to tech, finance, auto etc).
Look no further than China. China plans to retaliate by hitting the U.S. soybean industry. Yes, there will be some negative economic consequences to Trump’s tariffs. But as a percentage of U.S. GDP and the economy, these consequences will be miniscule. A few hundred million or billion dollars lost is chump change to an $18.5 trillion economy.
This is not the start of a full-blown global trade war that will cause a bear market in stocks. Other countries are more afraid of the U.S. than the U.S. is afraid of other countries. The U.S. is a net importer. Countries like China are net exporters. A trade war would hurt China much more than the U.S.
Business Insider also confirmed what I said earlier: Trump is not the first president to put tariffs on steel. Many presidents have tried before him. These tariffs mostly hurt the U.S. economy in the end, but on a very miniscule level. None of these tariffs directly caused a recession or bear market in stocks.
In addition, the U.S. Dollar doesn’t believe that there will be a major trade war. The USD should go up in a trade war. Remember how the USD spiked and Mexican peso crashed in late-2016 after Trump won and fears of a U.S.-Mexico trade war surged?
Instead, the USD went down yesterday after Trump announced tariffs. The U.S. dollar is telling us:

  1. This is not the start of a full-blown trade war, and…
  2. This is just a technical pullback in the stock market.


3 am. ISM Manufacturing: medium-long term bullish sign for the U.S. stock market.
Yesterday’s ISM Manufacturing reading went higher.

This is a medium-long term bullish sign for the U.S. stock market and economy. Historically, ISM Manufacuring always trends lower before a bear market and recession begins. ISM Manufacturing is trending higher right now.

Read Stock market on March 1 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. Troy, what are you thoughts on Netflix? It seems this stock is solidly in bubble territory (up 53% year to date, correction notwithstanding), and pretty much leading the market together with Amazon (30% year to date). It seems to me that things are getting quite hot, aren’t they? I’m just wondering where do we go from here. I don’t imagine that Netflix will crash and burn anytime soon, but if their stock bubble does pop, it’s easy to picture how it would quickly propagate across all tech, and eventually the entirety of the stock market. I can’t help but feel uneasy seeing Netflix ascend with the same furiosity Bitcoin did in December.

    • Hi Mahn,
      I don’t trade Netflix outside of a tiny position in my Day Trading portfolio. That being said, here are my thoughts:
      1. Stocks that lead the broad index tend to lead until the entire market tops. In other words, the bubble in Netflix will probably top almost at the exact same time as the top in the NASDAQ/S&P.
      2. Netflix is ridiculously overvalued. I think this thing will crash 90%+ in the next bear market. But valuations can’t be used to time market tops.
      3. Since I think the bull market in SPX still has 1-2 years left, I think Netflix still has 1-2 years to go.
      Please take this with a grain of salt. I don’t trade individual stocks in my medium-long term portfolio.

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