Stocks on July 21, 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 Conference Board’s Leading Economic Index continues to trend higher, which is medium-long term bullish for stocks
  2. 3 month Treasury yield is now higher than the S&P 500’s dividend yield. This IS NOT bearish for stocks.
  3. Earnings season has been extremely strong so far, which is medium-long term bullish for stocks.
  4. Profit margins are near record-highs. Neither bullish nor bearish for stocks.

Read Study: SKEW has spiked. What this means for stocks
1 am: The Conference Board’s Leading Economic Index continues to trend higher, which is medium-long term bullish for stocks
The latest reading for the Conference Board’s Leading Economic Index continues to trend higher.

As you can see, the Leading Economic Index tends to trend downwards before a recession and bear market begins. (Recessions are in grey).
1 am: 3 month Treasury yield is now higher than the S&P 500’s dividend yield. This IS NOT bearish for stocks.
The 3 month Treasury yield now exceeds the S&P 500’s dividend yield.

Contrary to what mainstream media would have you believe, this is NOT bearish for stocks. This does not mean that stocks have “competition” from bonds.
For starters, Treasury yields have been above the S&P 500’s earnings yields for MOST OF HISTORY (see study). There is nothing abnormal about the Treasury yield exceeding the dividend yield.

More importantly, comparing the dividend yield vs the Treasury yield is like comparing apples with oranges. Bonds are FIXED INCOME. They yield a FIXED return that is 100% shown in the bond yield. Stocks are different. Stocks only throw off a portion of their “returns” via the dividend yield. Stocks retain most of their earnings. So when you own stocks, you not only receive the dividend, but you also receive the retained earnings.
Hence, stocks investors aren’t going to switch to bonds en masse. Most people aren’t dividend investors.
1 am: Earnings season has been extremely strong so far, which is medium-long term bullish for stocks.
We are mid-way into Q2 2018 earnings season, and so far companies are beating earnings expectations AT A RECORD RATE.
According to Factset, 87% of companies have beat earnings expectations and 77% of companies have beat sales expectations.

Once again, strong earnings are being led by raw materials industries (because oil prices are up year-over-year) and the tech sector.

This is a medium-long term bullish sign for the stock market. It suggests that corporate earnings will continue to grow in the next few quarters.
The economy, corporate earnings, and stock market all move in the same direction in the medium-long term. Growing corporate earnings = bullish for the stock market.
1 am: Profit margins are near record-highs. Neither bullish nor bearish for stocks.
The S&P 500’s profit margins are near record-highs so far for Q2 2018 earnings season.

This is neither a bullish nor bearish factor for the stock market. Profit margins are a coincident indicator for stocks – they peak together with stocks and bottom together with stocks.

Read Stocks on July 20, 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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