Stocks on July 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 stock market’s buy the dip mentality is still strong. A short term bullish sign.
  2. While the Fed is still tightening monetary policy, monetary policy is still VERY EASY and accomodative.
  3. Industrial Production is still growing and trending sideways. Supports the “economy is strong” thesis, which is medium-long term bullish for stocks.
  4. Home Builder Sentiment: a medium-long term bullish sign for stocks.

Read Study: the “buy the dip” mentality is still strong, which is bullish for stocks
1 am: The stock market’s buy the dip mentality is still strong. A short term bullish sign.
I’m a little surprised as to how strong the stock market’s “buy the dip” mentality is right now. For example, Netflix tanked -13% on yesterday’s earnings report, and climbed its way to close -5% today.

Likewise, the NASDAQ gapped down on the open and surged higher.

Meanwhile the S&P 500 is starting to breakout.

The stock market’s “buy the dip” mentality is alive and strong, which suggests that any short term downside will be extremely limited. This is a short term bullish sign for the stock market.
1 am: While the Fed is still tightening monetary policy, monetary policy is still VERY EASY and accommodating.
Everyone seems to be focusing on the fact that the Fed is hiking interest rates and tightening monetary policy.
However, the more important point is that monetary policy is still VERY EASY despite the Fed’s rate hikes. The Fed will need to hike rates a few more times just to bring things back to normalcy.

An equally important measure is the REAL (inflation-adjusted) Fed Fund’s rate. Interest rates are still low when adjusted for inflation, which means that the Fed’s monetary policy is still very easy.

Hence, tightening monetary policy is unlikely to hurt stocks right now.
1 am: Industrial Production is still growing and trending sideways. Supports the “economy is strong” thesis, which is medium-long term bullish for stocks.
The year-over-year change in Industrial Production is still growing at 2%, which means that it hasn’t trended downwards yet.

This supports other economic data, which suggests that the U.S. economy is still growing at a solid pace. An improving economy = medium-long term bullish for the stock market.
1 am: Home Builder Sentiment: a medium-long term bullish sign for stocks.
The NAHB Housing Market Index (Home Builder Sentiment) has been flat for the past year. However, the important thing to note here is that Home Builder Sentiment is still trending higher. Historically, sentiment trends lower for at least a year before a bear market in equities begins. This supports the thesis that an equities bear market will not begin in 2018.

And lastly, the following chart shows you the most likely outcome of this trade war. U.S. stocks are new all time highs while Chinese stocks have crashed. As I’ve repeatedly said, this trade war isn’t as bad for the U.S. stock market as it’s hyped to be.

Read Stocks on July 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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