Stocks on August 16, 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. Fears of Turkish “contagion” are overblown
  2. Dr. Copper is not sending a bearish sign for the stock market and economy.
  3. Inflation-adjusted Retail Sales are still trending higher. A medium-long term bullish sign for the stock market and economy.

Read Study: is now the time to buy gold and silver for a short term bounce?

1 am: Fears of Turkish “contagion” are overblown

As you probably already know, Turkey and emerging markets are falling. If you read the latest Zerohedge headline about “Carnage”, you’d think that this “contagion” has caused a disaster in the U.S. stock market. Here’s the effect of Turkish “contagion” on the S&P 500.

We can outline 2 scenarios: a worst case scenario and a best case scenario.
The worst case scenario is that Turkey’s crisis turns into something like the 1997 Asian crisis. How did the U.S. stock market react?

The U.S. stock market made a very sharp decline, after which it quickly snapped upwards. Fears of “contagion” are almost always short-lived. This is because foreign and emerging markets are tiny compared to the U.S. The U.S. economy is $19 trillion. The Turkish economy is $857 billion, less than 5% the U.S.’ size.
I don’t think the Turkish crisis will be similar to the Greece crisis of 2010-2012. People only cared about Greece in 2010-2012 because Greece was a part of the EU. Turkey is not. If Greece’s economy cratered and Greece left the EU, that would have put the entire EU in jeopardy. Comparing Turkey today to Greece back then is an apples to oranges comparison.
The best case scenario is that Turkey’s troubles cause increased short term volatility in the U.S. stock market, which is what’s happening right now. Trading on the news is a fools game. You never know when the U.S. stock market will start and stop caring about Turkey’s problems.
Here’s proof that financial media literally invents reasons to explain the stock market’s day-to-day movements.

With that being said, I think this trendline represents maximum downside risk. Not exactly a lot.

1 am: Dr. Copper is not sending a bearish sign for the stock market and economy.
Copper is crashing right now on emerging market weakness (which was triggered by Trump’s trade war).

Financial dogma believes that copper is capable of predicting economic recessions and major declines in the stock market. They believe that copper prices are a sign of economic health, which makes copper a leading indicator for the stock market and economy.
Except it isn’t. Copper has its own supply and demand, which doesn’t have much to do with the U.S. economy or U.S. stock market. In recent years, copper prices have been more closely tied to the Chinese economy and Chinese stock market than the U.S. economy and U.S. stock market.
As you can see in the following charts, copper prices fell consistently from 2011 to 2015 while the U.S. stock market soared and the U.S. economy improved. Copper is not an indicator for the U.S. stock market.


1 am:  Inflation-adjusted Retail Sales are still trending higher. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Retail Sales demonstrates that inflation-adjusted Retail Sales are still trending higher.

This is a medium-long term bullish sign for the stock market because inflation-adjusted Retail Sales typically trend sideways before an equities bear market or economic recession begins.

This chart demonstrates the positive correlation between the S&P 500 and Retail Sales.

Read Stocks on August 15, 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.

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