Stocks on July 27, 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 sentiment shows “extreme optimism”. Not as bearish as you think.
  2. The stock market’s seasonality in August is a 50-50 bet.
  3. New Home Sales are still trending higher. A medium-long term bullish factor for the stock market.
  4. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  5. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  6. Lastly, gold’s sentiment is extremely pessimistic. A short buy BUY?

Read Study: the stock market continues to ignore “sell in May and go away”. A bullish sign
1 am: the stock market’s sentiment shows “extreme optimism”. Not as bearish as you think.
The Daily Sentiment Index (DSI) is a pretty popular gauge of the market’s sentiment. The S&P 500’s DSI now shows “extreme optimism” for the first time since January 2018. Conventional technical analysis teaches you that “extreme optimism” is bearish.

This clearly isn’t the case. Sentiment is not useful for picking the stock market’s short term, medium term, or long term tops. The stock market can show “extreme optimism” for A LONG TIME without falling. Sentiment was consistently “extremely optimistic” from 2016-2017, yet the stock market rarely went down.
*Sentiment is more useful for picking the stock market’s bottoms than the stock market’s tops.
1 am: the stock market’s seasonality in August is a 50-50 bet
You should ignore seasonality for August. The S&P 500 has a 50-50 chance of going up vs. down in the past 67 years.

However, you can also see that the S&P has had a tendency to fall in August in the past 10 years.

1 am: New Home Sales are still trending higher. A medium-long term bullish factor for the stock market.
New Home Sales’ latest reading went down from 666k to 631k. But more importantly, New Home Sales are still trending higher. This is a medium-long term bullish sign for the stock market.

*New Home Sales tend to fall for 1-2 years BEFORE the equities bull market ends. We are watching out for signs of sustained deterioration in New Home Sales. There have been none so far.

1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Initial Claims went up a little (from 208k to 217k). However, the key point is that Initial Claims are still trending lower right now. Initial Claims recently made a new low 2 weeks ago.

*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).
We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Initial Claims. A downwards trending Initial Claims = medium-long term bullish for the stock market.

1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Continued Claims went down  a little from the previous week’s reading (from 1.753 million to 1.745 million). But the key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

1 am: Lastly, gold’s sentiment is extremely pessimistic. A short buy BUY?
Sentiment towards gold is starting to become EXTREMELY pessimistic, which as most traders know, is a bullish sign.

Meanwhile, gold has a strong support level approaching at $1200.

Some contrarian gold traders are starting to turn bullish.
*I don’t trade gold. So take my gold-related thoughts with a grain of salt.
Read Stocks on July 26, 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.

2 comments add yours

  1. Troy, what do you make of the earnings call results and subsequent retracements of Netflix (-14%) Facebook (-20%) and now Twitter (-20%)? Are we seeing a trend? These reactions appear to be much more aggresive than usual.

    • Hi Mahn,
      I’m seeing it more as a buying opportunity for FB. P/E tanked from 30 to 24, and earnings are still expected to grow 20%+ a year.

Leave a Comment