Stocks on August 4, 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. Q2 2018 earnings season has been EXTREMELY STRONG, and corporate earnings will continue to grow. Medium-long term bullish for the stock market.
  2. The McClellan Summation Index is rolling over. NOT as bearish for the stock market as you think.
  3. The Unemployment Rate is trending down. Medium-long term bullish for the stock market.
  4. The recent slowdown in real estate isn’t “reminiscent of 2008”

Read Studies: false narratives about the stock market and economy that are just wrong
1 am: Q2 2018 earnings season has been EXTREMELY STRONG, and corporate earnings will continue to grow. Medium-long term bullish for the stock market.
Q2 2018 earnings season has come and gone, and the results are fantastic.
80% of companies beat earnings expectations and 74% of companies beat sales expectations. This is the highest percentage of “beats” since Factset began collecting data in Q3 2008! And for the second consecutive quarter, earnings growth has exceeded 20%.
Most analysts are too concerned with questions such as “will earnings growth decelerate”. That’s irrelevant. The stock market follows the DIRECTION of corporate earnings in the long run – it doesn’t care about how fast earnings grow. What matters is “are earnings growing or shrinking”.
So even if corporate earnings growth slows down in the next few quarters (which it probably will), corporate earnings will still continue to grow. Hence, the U.S. stock market will trend higher with corporate earnings. The Leading Economic Indicators do not point to a decrease in corporate earnings.

1 am: The McClellan Summation Index is rolling over. NOT as bearish for the stock market as you think.
One of the main themes we examine here at BullMarkets is that traditional technical analysis isn’t very useful for the stock market. There are simply too many false signals, thereby leaving the user no better off than someone who ignores the indicator.
A widely-used but not very useful indicator is the McClellan Summation Index. This breadth indicator is “supposed to” confirm the stock market’s breadth. In a conventional technical analysts’ mind, a stock market that’s rallying while the McClellan Summation Index trends downwards is “bearish”, because “breadth isn’t confirming the stock market’s trend”.
This is happening right now. The S&P 500 is trending higher while the McClellan Summation Index is trending lower.

Except history has proven that these kind of “bearish divergences” aren’t bearish at all. It’s perfectly normal for the stock market to trend higher while the McClellan Summation Index trends lower.



1 am: The Unemployment Rate is trending down. Medium-long term bullish for the stock market.
The latest reading for the Unemployment Rate fell from 4% to 3.9%. But more importantly, unemployment is still trending downwards.

The Unemployment Rate’s downwards trend confirms Initial Claims’ and Continued Claims’ downwards trends. And since the jobs market is a leading indicator for the stock market and economy, a downwards trending Unemployment Rate is medium-long term bullish for the stock market.
1 am: The recent slowdown in real estate isn’t “reminiscent of 2008”
It’s the financial media’s job to entertain and create clickbait headlines. It’s your job as a trader/investor to remain objective and rational.
The U.S. housing market has slowed down recently (as have many large international cities like Sydney, London, Toronto, etc). Part of this is due to a slowdown in Chinese buyers.
Of course, every single slowdown has the bears screaming “watch out, we’re going to crash like 2008 again!”

That’s why stepping back for a little bit of perspective matters.

As you can see, housing prices have fallen a little. But in the grand scheme of things, this is just a small and NORMAL dip in the housing market. No market goes up in a straight line without pausing from time to time.
Another housing induced stock market crisis like 2008 is unlikely right now. Activity leads prices in the real estate market (see model). And with housing activity still trending higher, real estate prices will probably continue to trend higher. This is just a temporary dip.
So don’t be too worried about another stock market crash like 2008. The conditions back then are very different than the conditions today.

Read Stocks on August 3, 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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