Stocks on July 23, 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 Insider Transaction Ratio just spiked. A potential short term bearish factor for the stock market.
  2. China crashing the U.S. stock market to hit back at the U.S. is a ridiculous theory.
  3. Citigroup Economic Surprise Index is flirting with negative. Mostly irrelevant for the stock market.
  4. The rising U.S. Dollar isn’t bearish for the stock market.

Read Study: SKEW has spiked. What this means for stocks
Read Study: should stock market investors go long VIX?
1 am: The Insider Transaction Ratio just spiked. A potential short term bearish factor for the stock market.
Barrons produces an Insider Transaction Ratio, which is the ratio of insider sales to buys. Readings under 12:1 are short term bullish for the stock market, readings above 20:01 are short term bearish for the stock market. The latest reading is approximately 58:1

But as you can see, this indicator is far from perfect. From May 29:

The Insider Transaction Ratio spiked in July 2017 and September 2017. The stock market continued to rally after these spikes in Insider Selling.
1 am: China crashing the U.S. stock market to hit back at the U.S. is a ridiculous theory.
Recently there’s this theory going around the financial world that “China could crash the U.S. stock market to hit back at the U.S. in this trade war”. This theory is just wild speculation and plain hocus pocus.
For starters, China doesn’t have enough money to “crash” the U.S. stock market. The U.S. stock market’s market cap is $30 trillion. China has just $3 trillion in forex reserves, the vast majority of which are in bonds. This world is too big for one actor (e.g. the Chinese government) to have a big impact on the stock market.
But the more important point is that China doesn’t own U.S. stocks in the first place! In order for China to sell and “crash” the U.S. stock market, they have to buy and bid-up U.S. stocks first. It doesn’t make any sense for China to bid up U.S. stocks (buy high) and then dump U.S. stocks (sell low). China would lose a ton of money doing so.
1 am: Citigroup Economic Surprise Index is flirting with zero. Neither bullish nor bearish for the stock market.
The Citigroup Economic Surprise Index is flirting with zero.

To some professionals, this means that the U.S. economy is starting to “roll over”, which is medium-long term bearish for stocks. They’re wrong.
The Citigroup Economic Surprise Index doesn’t even measure whether the economy is deteriorating or improving (factually). It just measures whether the data is beating or missing analysts’ expectations. There’s a big difference between these two things.
With the Economic Surprise Index headed towards zero, this just means that analysts’ expectations have finally caught up with that of reality. Reality is no longer consistently beating analysts’ expectations.
As you can see, it is very common for the Economic Surprise Index to go negative. The stock market’s correlation with the Citigroup Economic Surprise Index is mostly random.

1 am: The rising U.S. Dollar isn’t bearish for the stock market.
The U.S. Dollar Index continues to bump up against its 95 resistance, prompting some stock market investors to fear a USD breakout.

A USD breakout isn’t a consistently bearish factor for the U.S. stock market.
For starters, the USD and S&P 500 have a positive correlation right now (20 weekly correlation).
Moreover, the long term correlation between the USD and S&P 500 is mostly random. The correlation fluctuates between negative and positive with no consistent pattern.

Using correlation to trade the U.S. stock market is usually not a good idea.
Read Stocks on July 21, 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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