Stocks on July 26, 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. Ray Dalio’s analogue to 1937 is WRONG.
  2. The stock market is “rotating”, which is bullish.
  3. Truck Tonnage is still trending higher. A medium-long term bullish sign for the stock market.
  4. The Fed is tapering very slowly to prevent a big decline in the financial markets.
  5. Interest rates may rise, but are TOO LOW to hurt the stock market.

Read Study: the stock market is near new all-time highs. Forward returns are VERY BULLISH
With that being said, Facebook is likely to open down approximately -20% today. The other 2 times Facebook tanked more than -10% on the open, it soared in the next 3-6 months.

1 am: Ray Dalio’s analogue to 1937 is WRONG
A permabear’s favorite line is “the stock market LOOKS LIKE it’s about to crash”. The stock market always “looks like” it’s about to crash. In reality, crashes are few and far between.
One such argument is that the stock market “looks like” it’s copying 1937, during which the stock market went up and then crashed (from Ray Dalio)

This analogue is a load of BS, plain and simple. The stock market doesn’t have a mind of its own. It doesn’t decide to “copy” a historical chart because it doesn’t have a brain.
The stock market’s medium-long term direction is determined by its fundamentals. The stock market’s fundamentals today are vastly different than they were in 1937.
For starters, unemployment today is 4%. Unemployment before the 1937 crash was at 14%. The economy today is much healthier than it was in 1937. Remember: the economy was still mired in the Great Depression in 1937. The U.S. economy is healthy today. The only people who argue that the U.S. is still in a recession are the doom-and-gloom (the world is ending) crowd.
Moreover, the Dow Jones Industrial Average in 1937 was still significantly below its 1929 high. Today, the U.S. stock market has made MASSIVE new highs compared to its 2007 high.
The market environment of today vs. 1937 is as different as night and day.
1 am: the stock market is “rotating”, which is bullish.
By now you’ve probably heard of Facebook’s 24% post-earnings crash and Netflix’s 13% post-earnings crash. Some people said that this was a “canary in the coal mine”.
That’s clearly not the case with the S&P 500 futures near all-time highs.

Here’s the simple fact. No single company is big enough to have a drastic impact on the overall S&P 500. Facebook’s 24% crash caused a *gasp* 8 point drop in the S&P 500’s futures.
The stock market is trending higher with the improving U.S. economy. Individual earnings reports don’t matter that much because as a whole, the U.S. stock market is beating earnings expectations at the highest pace since 2010. FANG may be big, but they aren’t the end-all and be-all for the U.S. stock market.
1 am: Truck Tonnage is still trending higher. A medium-long term bullish sign for the stock market.
The latest reading for Truck Tonnage just made a new high. The key point is that Truck Tonnage continues to trend higher. This is a medium-long term bullish sign for the stock market.

Truck Tonnage is a medium-long term leading indicator for the stock market and economy. Historically, Truck Tonnage trends downwards before an equities bear market and economic recession begins. Truck Tonnage is trending upwards right now.
1 am: The Fed is tapering very slowly to prevent a big decline in the financial markets
Every now and then there are these fears that the Fed’s tightening will kill the stock market.

  1. The exact same thing was said in 2013 when the Fed announced tapering. The stock market has soared since then.
  2. The exact same thing was said in 2014 when the Fed stopped QE. The stock market has soared since then.

The simple reality is that the Fed is tightening monetary policy VERY SLOWLY – too slowly to hurt the financial markets. The Fed may be unwinding its balance sheet, but is doing so in an extremely slow manner.

1 am: Interest rates may rise, but are TOO LOW to hurt the stock market.
Remember a few months ago when everyone was afraid that interest rates would rise significantly and hurt the stock market?
That hasn’t happened. The 10 year yield is stuck at around 3%. Stocks have been going up in the past few months.

The simple reality is that the 10 year yield is too low to hurt stocks, even if it goes up a little. More importantly, the real (inflation-adjusted) 10 year yield is still around zero.

Interest rates aren’t “spiking”, and aren’t even high right now.
Read Stocks on July 25, 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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