Stocks on July 28, 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. Fund managers are afraid that the trade war will derail the bull market. And over the past 9 years, they’ve been consistently wrong.
  2. Another stock market pullback (short term bearish)?
  3. Breadth continues to trend higher. A medium term bullish sign for stocks.
  4. The stock market is overreacting to “FANG’s demise”.

1 am: Fund managers are afraid that the trade war will derail the bull market. And over the past 9 years, they’ve been consistently wrong.
Merill Lynch’s fund managers survey demonstrates that their biggest fear is a “trade war”.

And as you can see, fund managers have been CONSISTENTLY WRONG about what will derail the bull market in the past 9 years.

  1. Afraid that EU debt crisis would kill the U.S. bull market (2011-2012). It didn’t
  2. Afraid that fiscal cliff would kill the U.S. bull market (2013). It didn’t
  3. Afraid that China’s/Europe’s economic deterioration would kill the U.S. bull market (2013-2015). It didn’t
  4. Afraid that political populism would kill the U.S. bull market (2016). It didn’t
  5. Afraid that quantitative tightening would kill the U.S. bull market (2017). It didn’t

Read Study: the Russell is short term bearish and medium term bullish for stocks
1 am: Another stock market pullback?
Sorry guys, this chart is delayed by a day.
The Put/Call Ratio was very low on Thursday at 0.74 (it spiked on Friday). Year-to-date in 2018, the Put/Call Ratio has only been this low in January 2018 and June 2018. The S&P fell at least a little in both of these cases.

This suggests that the S&P 500 has a maximum downside risk to its rising trendline. As you can see, this maximum downside risk is limited.

1 am: Breadth continues to trend higher. A medium term bullish sign for stocks.
The NYSE’s advance-decline cumulative line (breadth indicator) recently made a new high.

This is a bullish breadth divergence. As demonstrated in this study, breadth leads the stock market higher. Historically, the cumulative Advance-Decline line trends down before a bear market begins (see study)
1 am: The stock market is overreacting to “FANG’s demise”.
Some high flying tech stocks tanked on their earnings. These are very aggressive reactions.

  1. Netflix fell -14%
  2. Facebook fell -20%
  3. Twitter fell -20%
  4. Amazon gapped up and reversed down.

Does this mean that the end is near? Afterall, conventional trading wisdom states that “when the leaders cease to lead, the rally is dead”.
And once again, conventional trading wisdom is probably wrong. If FANG’s demise was so bad for the stock market, why is the S&P 500 down barely more than 1%?

“FANG’s demise” caused the NASDAQ to fall -2.5%

While FANG is big, it isn’t the end-all and be-all for the stock market. The stock market hasn’t fallen significantly because other stocks are rallying on their strong earnings reports. This is called “sector rotation”, which is normal during bull market rallies. There is nothing bearish about sector rotation (high flying sectors falling and other sectors picking up the slack).
Read Stocks on July 27, 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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