*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.
- Corporate buybacks will decrease in September. A short term bearish factor for the stock market
- The S&P is above its Bollinger Band. A short term bearish factor for the stock market
- NASDAQ is at 8000 (round # resistance). Not bearish for the stock market
- A lack of breadth thrusts is irrelevant to the stock market
- Profit margins continue to make new highs. Neither bullish nor bearish for stocks.
Read Study: S&P, Russell 2000, and NASDAQ all made new highs together. What’s next
1 am: Corporate buybacks will decrease in September. A short term bearish factor for the stock market
On August 6 I demonstrated that corporate buybacks tend to surge in August. And so far, this surge in buybacks has helped push the stock market higher.
*Record-breaking corporate buybacks are putting a floor under the stock market this year.
Corporate buybacks are expected to decrease in September. This supports the short term case that the U.S. stock market will be weaker in September than August.
1 am: The S&P is above its Bollinger Band. A short term bearish factor for the stock market
The S&P 500 has closed firmly above its 20 daily Bollinger Band (2 standard deviations). As a result, some traders expect a short term (couple of days) pullback.
Throughout 2018, the S&P has made a short term top each time it reached its upper Bollinger Band.
However, this was clearly not the case in 2017. The S&P frequently trended higher after reaching its upper Bollinger Band.
This is a short term bearish factor for the stock market right now. However, I wouldn’t read too much into it. Bollinger Band is useful when the market is in a consoldiation pattern (e.g. a correction). Once it makes a new high, its usefulness diminishes.
1 am: NASDAQ is at 8000 (round # resistance). Not bearish for the stock market
The NASDAQ has now reached 8000, a round number resistance (based on conventional technical anlaysis).
But contrary to what conventional technical analysis tells you, round number resistance isn’t resistance at all. It’s mostly meaningless.
In the past, the NASDAQ had no consistent tendency to pullback after reaching a round # resistance.
1 am: A lack of breadth thrusts is irrelevant to the stock market
Too many traders focus on the trees and ignore the forest. Looking for “breadth thrusts” is a prime example of this.
“Breadth thrusts” are surges in breadth, similar to surges in the economy’s growth rate. Some traders believe that a stock market rally must be confirmed by “breadth thrusts”. It’s not good enough for breadth to be “decent”.
The data proves that this theory is wrong. It is perfectly normal for the stock market to rally without breadth thrusts.
As you can see in the above chart, the U.S. stock market frequently rallies when there are no “breadth thrusts” (in white).
The only thing that matters is whether or not breadth is trending higher with the stock market (which it is right now). Here’s the Advance-Decline line.
*Similarly, it’s perfectly normal for the stock market to go up when economic growth is decelerating. The stock market doesn’t care if economic growth is increasing or decreasing. The only thing that matters is whether or not the economic is growing or shrinking. Rates of growth (second derivative) doesn’t matter.
1 am: Profit margins continue to make new highs. Neither bullish nor bearish for stocks.
Profit margins made new highs during Q2 2018. This is neither bullish nor bearish for the U.S. stock market. Historically, profit margins peaked at the same time as the stock market (in 2007 and 2000). Profit margins = a coincident indicator (neither leading nor lagging).
- Profit margins tend to fall during recessions because corporate revenues fall faster than costs.
- Profit margins tend to rise during economic expansions because corporate revenues rise faster than costs.
Here’s what I think will happen based on my discretionary outlook.
- 2018 will trend higher but will also be a choppy year.
- 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.