Stocks on August 3, 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. Apple has reached a $1 trillion market cap. NOT a sign of excess stock market speculation.
  2. The stock market is starting to ignore the trade war news. A sign of bullish price action.
  3. Gartman has now turned bearish on the U.S. stock market. You know what that means 😉
  4. The 10 year Treasury yield has once again reached 3%. And right on cue, the bears are “afraid” that rising interest rates will kill the stock market.
  5. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  6. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Read: Study: the stock market’s “buy the dip” mentality is bullish for stocks
1 am: Apple has reached a $1 trillion market cap. NOT a sign of excess stock market speculation.
Apple is now officially valued at $1 trillion, leading many (particularly the permabear crowd) to cry “stock market bubble!”
This is a ridiculous assertion. For starters, the nominal value of market cap means nothing because this figure ALWAYS goes higher over time thanks to inflation. A $100 billion company 50 years ago = a $1 trillion company today. A $1 trillion company will equal a $10 trillion company in 50 years. Nominal records are made to be broken simply due to inflation.
More importantly, a company’s market cap tells you NOTHING about how overvalued/undervalued a company is. Here’s the simple fact: companies that make more money tend to have larger market caps, and companies that make less money tend to have smaller market caps.
In other words, the more money you make, the more you’re worth.
Apple has a $1 trillion market cap simply because it makes so much money. Apple has a P/E ratio of 18, which is barely greater than the S&P 500’s long term average P/E of 15.
In comparison, the S&P 500’s P/E ratio is 24 right now, which means that Apple is actually “cheaper” than the rest of the stock market right now. Apple reaching $1 trillion is not a sign of “exuberant speculation”. Here’s a funny but very true tweet.

1 am: The stock market is starting to ignore the trade war news. A sign of bullish price action.
The U.S. stock market is increasingly ignoring trade war-related news. It used to fall 1-2 days after a trade war piece of news was released. Now the S&P 500 can’t even fall 1 day on a trade war related news. The “buy the dip” mentality is extremely strong.

This is a sign of bullish price action. The stock market is increasingly ignoring the noise (i.e. trade war news) and focusing on the signal (strong economy and solid corporate earnings).
1 am: Gartman has turned bearish on the U.S. stock market
*In case you didn’t know, Gartman is a solid contrarian indicator. His bullish/bearish calls have a <50% accuracy rate.
Gartman has been an excellent contrarian indicator for the stock market so far in 2018.

  1. The stock market goes up, Gartman turns bullish (“stocks will break out and soar!”), then the stock market tops.
  2. The stock market goes down, Gartman turns bearish (“prepare for a crash!”), then the stock market bottoms.

2 weeks ago Gartman became very bullish, right before the stock market started to experience some short term weakness. Now that the stock market has fallen a little bit, Gartman has become very bearish.
From Gartman: “We fear that the music has stopped”.
With Gartman so bearish, and a less than 50% accuracy rate, this is a bullish sign.
1 am: The 10 year Treasury yield has once again reached 3%. And right on cue, the bears are “afraid” the rising interest rates will kill the stock market.
Remember a few months ago how everyone was “afraid” that rising interest rates would kill the stock market? There were a lot of charts which suggested that “if the 10 year rises above 3%, it’s all over”.
Well that crowd turned out to be wrong. The 10 year yield has been around 3% for a few months, and nothing bad has happened to the stock market.
With the 10 year yield once again at 3%, there’s no reason to suspect with it will be bearish for the stock market this time.

This is because even though interest rates are rising, they are still TOO LOW to hurt the U.S. stock market or economy. Real (inflation-adjusted) interest rates are still around zero.

1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Initial Claims went up a little (from 217k to 218k). However, the key point is that Initial Claims are still trending lower right now. Initial Claims recently made a new low 2 weeks ago.

*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).
We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Initial Claims. A downwards trending Initial Claims = medium-long term bullish for the stock market.

1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Continued Claims went down  a little from the previous week’s reading (from 1.747 million to 1.724 million). But the key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

Read Stocks on August 1, 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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