Stocks on August 11, 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.
The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

  1. The Put/Call Ratio spiked. The stock market’s short term downside risk is limited.
  2. Labor market conditions are bullish for the stock market
  3. Unit profits are down: this equities bull market doesn’t have a lot of years left.

Read: USD is rising. What this means for currencies and stocks
1 am: The Put/Call Ratio spiked. The stock market’s short term downside risk is limited.
The Put/Call ratio spiked to 120% on Friday. What’s particularly interesting is that the Put/Call ratio is spiking on smaller and smaller declines in the stock market. In other words, the stock market needs to fall less and less in order to register “fear”, which is a bullish contrarian sign for the stock market.

The Put/Call ratio is currently at 120%. Year-to-date in 2018, the stock market was either at a short term bottom or close to making a short term bottom when the Put/Call ratio reached 120%. This suggests that the stock market’s short term downside is limited right now.
1 am: Labor market conditions are bullish for the stock market
The Kansas City Fed creates a Labor Markets Conditions Index, which is turned into a momentum indicator. This measures the strength of the labor market.
The U.S. labor market is healthy right now. This is a medium-long term bullish sign for the stock market right now. You can see the labor market conditions fell to zero at the top of previous bull market peaks.

The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.
1 am: Unit profits are down: this equities bull market doesn’t have a lot of years left.
Corporate unit profits have been down since the end of 2014.

This IS NOT a timing indicator for predicting the end of bull markets. Sometimes unit profits will fall a year or two before recessions and bear markets begin. Sometimes unit profits will fall for half a decade before unit profits begin. But this does tell us that 2014/2015 marked the halfway point for this economic expansion and bull market.
This indicator suggests that this equities bull market doesn’t have many years left.
Read Stocks on August 10, 2018: outlook

Outlook

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

  1. 2018 will trend higher but will also be a choppy year.
  2. The S&P 500 has approximately 1 year left in this bull market.

I do not use my discretionary outlook to place entry/exit trades. I am 100% long SSO (2x S&P 500 ETF) because my Medium-Long Term model does not foresee a big correction at this point in time. I ignore small corrections. I only sidestep big corrections and bear markets.
I have been long the S&P 500 since September 7, 2017 when it was at 2465.
*I also have a small Day Trading portfolio. Click here to view my day trades.

2 comments add yours

  1. Hi Troy,
    I find that your Medium-Long Term Model is really awsome as it tries to predict the next bear market / big corrections.
    It is oriented to time (more precisely, to conditions: when XYZ conditions happen, then we have a bear mkt / significant correction), but have you ever worked about levels?
    In other words, the MLT is stating that the current bullmarket has 1 -1.5 year left, but can it predict even an approximate topping level of the S&P?
    e.g. ~ 3000 points?

    • Hi Carlo,
      No it cannot. That’s one of the things I learned a lot of years ago from Northmantrader (someone I used to follow). You can either predict TIME or MAGNITUDE, but you can’t predict both. In a way, this means that it’s easier to predict the market’s direction than the exact price target.

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