Stocks on August 13, 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. Citigroup’s Panic/Euphoria Model registered “euphoria” last week. Not as bad as you think it is, but watch out if this reading persists for a few months.
  2. Korea’s stock market is sinking. Not a “canary in the coal mine” for the U.S. stock market.
  3. Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
  4. Foreign buyers aren’t bullish enough on U.S. equities. Suggests that the rally still has room to run.

Read Studies: more signs that the stock market will rally until 2019
1 am: Citigroup’s Panic/Euphoria Model registered “euphoria” last week. Not as bad as you think it is, but watch out if this reading persists for a few months.
Citigroup publishes a Panic/Euphoria Model (sentiment indicator). It just registered a “Euphoria” reading last week for the first time since January 2018.

Data for this indicator is hard to find, which means that I’m unable to do quantitative market studies on this indicator. However, you can see from Citigroup’s own description that this is more useful as a BUY signal (when there’s “panic”) than as a SELL signal (when there’s “euphoria”).
Finding historical charts on this indicator is also pretty hard, but I’ve managed to find the following.

As you can see, the Panic/Euphoria model tends to turn bearish too early.

  1. It registered “euphoria” at the beginning of 1999, 1.5 years before the bull market topped in 2000.
  2. It registered “euphoria” at the end of 2007, at the top of the bull market
  3. It registered “euphoria” at the beginning of 2014, 1.5 years before the stock market made a “big correction” in 2015.

The Panic/Euphoria model first registered “euphoria” in December 2017, and has now registered “euphoria” again. The key point is that you should wait for multiple months with “euphoria” readings. If the model keeps registering “euphoria” throughout the rest of 2018, then the stock market will probably make an important top in 2019.
Some people are critical of Citigroup’s Panic/Euphoria Model. From Trader’s Narrative in 2008:
The data isn’t even historically comparable. Citigroup constantly tweaks what goes into the model. So “euphoria” today isn’t “euphoria” a few years ago. Moreover, this model is a blackbox. You have no idea what goes into it.
1 am: Korea’s stock market is sinking. Not a “canary in the coal mine” for the U.S. stock market.
South Korea’s stock market is sinking right now along with other emerging markets.

Some people believe that South Korea’s stock market is a “canary in the coal mine” for the global economy and U.S. stock market. This is because exports account for 40% of South Korean GDP, which makes Korea a bellwether for global trade.
Here’s where some people make a mistake. South Korea’s stock market and economy are a bellwether for global trade and the global economy. HOWEVER, the U.S. economy and stock market are often impervious to problems in foreign economies and stock markets. In South Korea’s case, “global economy” refers moreso to emerging markets (ex-U.S.)
South Korea’s stock market went nowhere from 2011-2016 while the U.S. stock market trended higher. A weak South Korean stock market isn’t consistently bearish for the U.S. stock market.

South Korea’s sinking stock market is mostly a function of Trump’s trade war. It doesn’t signal that there’s a problem in the U.S. economy or stock market.
1 am: Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
The S&P 500’s net earnings revisions are still significantly positive.

The S&P 500’s Net Earnings Revisions turns negative before economic recessions and equity bear markets begin. During economic expansions, it has shown mixed performances because analysts tend to downgrade their earnings expectations as the year goes on. That’s why negative Net Earnings Revisions is a necessary but not sufficient requirement for equities bear markets and economic recessions.
Net Earnings Revisions is far from negative right now. A bear market has not begun, and nor is one imminent.
1 am: Foreign buyers aren’t bullish enough on U.S. equities. Suggests that the rally still has room to run.
One of the questions I seen get thrown around a lot is “U.S. investors are already very bullish on the U.S. stock market – who’s left to buy”? The answer is “foreign buyers”.
Foreign buyers are a contrarian signal for the U.S. stock market – they tend to buy U.S. stocks like crazy at tops and sell stocks like crazy at bottoms. And right now, foreign buyers have yet to “buy like crazy”.

As you can see from the chart above, foreign buyers are just starting to turn bullish on the U.S. stock market. This is a nominal data series, which means that foreign buying is even lower than previous bull market peaks when adjusted for inflation. Foreign buying needs to get crazier before this “big rally” and bull market can end.
Read Stocks on August 11, 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’m surprised that you haven’t mentioned anything about Turkey.

    • Hi Ahmad,
      Turkey is too small of an issue. It isn’t big enough to have a meaningful impact on the U.S. stock market.

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