Stocks on July 17, 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 “breadth is weak” argument is wrong.
  2. The stock market’s valuations are still high. This isn’t as bearish as you think.
  3. Inflation-adjusted Retail Sales are still trending higher. A medium-long term bullish sign for the stock market and economy.

Read Study: a better yield curve for predicting the stock market is bullish
1 am: The “breadth is weak” argument is wrong.
Not a day goes by in which you don’t see one of these “if it wasn’t for FANG, the stock market would be screwed” arguments.

This argument is silly. It’s like saying “if it wasn’t for the fact that Amazon didn’t go to $0, the stock market would be down -10% this year”. It’s like saying “if you strip out the companies that went up this year, the index will be down”. Well no duh Sherlock. We can also say “if we strip out the companies that went down this year, the index will be up a lot more”.
Here’s the simple, mathematical fact. A few large companies will ALWAYS account for the bulk of the S&P 500’s gains in ANY YEAR. This is true in every single decade. The S&P 500 is a market-cap weighted index, hence large companies will have a bigger impact on the S&P than smaller companies will.
Breadth is positive. It’s not just FANG that’s going up.
Small caps are going up as well.

The Wilkshire 5000, which encompasses the ENTIRE U.S. stock market, is also close to making new all-time highs.

The NYSE Advance-Decline line (breadth indicator) continues to trend higher

1 am: The stock market’s valuations are still high. This isn’t as bearish as you think.
The stock market is “overvalued” by pretty much every metric, including my favorite the Tobin’s Q Ratio.

But as you can see, valuations tell you nothing about what the stock market will do in the next 1-2 years. The stock market has been consistently “overvalued” from 1995-present. Anyone who avoided stocks just because they’re “overvalued” would have missed out on massive gains.
The following chart demonstrates that the stock market’s valuation and 1 year forward returns have a VERY LOW correlation.

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 July 16, 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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