Stocks on August 18, 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 Philadelphia Fed Index is falling. NOT bearish for the stock market.
  2. Breadth continues to trend higher. A medium term bullish sign for stocks.
  3. Wal-mart’s rally is not a sign of weakness in the stock market or economy.
  4. The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.

Read Study: Heavy Truck Sales is sending a bullish sign for the stock market
1 am: The Philadelphia Fed Index is falling. NOT bearish for the stock market.
The Philadelphia Fed Index has been falling recently, prompting some market watchers to become bearish. I don’t think they understand how limited in scope this index is.

  1. The Philadelphia Fed Index is a REGIONAL index. It only covers the Pennsylvania, New Jersey and Delaware regions. This is not a national economic indicator.
  2. Any reading above 0 signals economic expansion, any reading below zero signals contraction.

The Philadelphia Fed Index is still above zero, which signals economic expansion, although the rate of growth is falling.

More importantly, this index is not very useful for predicting the U.S. stock market. As you can see, this index trended downwards consistently from 2004 – 2007 while the U.S. stock market went up.
1 am: Breadth continues to trend higher. A medium term bullish sign for stocks.
The NYSE’s advance-decline cumulative line (breadth indicator) just made a new all-time high.

This is a bullish breadth divergence. As demonstrated in this study, breadth leads the stock market higher. Historically, the cumulative Advance-Decline line trends down before a bear market begins (see study)
1 am: Wal-mart’s rally is not a sign of weakness in the stock market or economy.
There’s a lot of nonsense on fintwit that’s very popular. This nonsense does nothing but cause investors and traders to underperform in the long run.
One example of such nonsense comes from my favorite permabear David Rosenberg, who has probably predicted 50 of the last 1 recessions. (I love reading his stuff because a lot of it is really popular and laughably silly). Here’s his latest and greatest:

First of all, Wal-Mart’s stock tends to move in sync with the S&P 500. A rising Wal-Mart is not bearish for the U.S. stock market. Here’s Wal-Mart’s 20 monthly correlation with the S&P 500. Notice how the 2 markets tend to move in the same direction.

Wal-Mart’s stock tends to lag the S&P 500 in a bull market: it doesn’t mean that Wal-Mart goes down when the S&P goes up. In a bear market, Wal-Mart falls with the S&P 500: Wal-Mart merely falls less than the S&P 500.
This is just another example of financial dogma. When defensive stocks outperform the overall stock market, it doesn’t necessarily mean that the stock market and economy are “doomed”. Looking at David Rosenberg’s chart, Wal-mart outperformed from 2011-2012 while the U.S. stock market went up.
1 am: The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.
Many traders like to guess when the unemployment rate will bottom and start to tick up. This is a silly exercise and waste of time. Any guess is just a guess – nothing more. A better measure of “full employment” = Unemployment Rate – CPI (inflation). As you can see from the following chart, this data series tends to approach 0 towards the end of an economic expansion and equities bull market.

The Unemployment Rate – CPI is currently at 1.01%, which means that:

  1. The economic expansion and bull market are not over, but…
  2. We are near the last leg of this bull market.

*The economy and stock market move in the same direction in the medium-long term.
Read Stocks on August 17, 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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