Stocks on July 3, 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.

Thoughts

  1. The U.S. stock market is the only major stock market in the world that went up in first half of 2018. Not a bearish sign for the U.S. stock market.
  2. 10 stocks accounted for all of the S&P 500’s gains in the first half of 2018. NOT a bearish sign for the stock market.
  3. ISM Manufacturing is still trending higher. A medium-long term bullish sign for the stock market
  4. As expected, corporate buybacks are putting a floor under the stock market.

Read Study: gold will probably make a short term bounce
Read Study: short term bullish case for Chinese stocks and emerging markets
1 am: The U.S. stock market is the only major stock market in the world that went up in first half of 2018. Not a bearish sign for the U.S. stock market.
Canada aside, the U.S. stock market is the only major stock market in the world that went up in the first half of 2018.

  1. European stock markets are falling
  2. Asian stock markets are falling
  3. Emerging stock markets are falling

The U.S.’ outperformance has raised talk about “contagion”. I disagree.
Contrary to what globalists will tell you, global stock markets don’t always move in sync. It is completely normal for different stock markets to move in different directions. E.g. the Asian financial crisis in 1997 caused a “small correction” in the U.S. stock market, but the U.S. stock market still soared in 1997. The 1998 Russian crisis caused a “significant correction” in the U.S. stock market, but the U.S. stock market still soared in 1998.
America’s recent “exceptionalism” is partially due to the trade war talk. But more importantly, it is driven by the U.S. economy’s strength. As long as the U.S. economy continues to grow at its current pace, I expect the U.S. to continue to outperform. The U.S. economy shows no signs of significant slowdown right now.
The S&P 500 is still sitting on a rising trendline.

1 am: 10 stocks accounted for all of the S&P 500’s gains in the first half of 2018. NOT a bearish sign for the stock market.
It’s the financial media’s job to promote scary-looking headlines that drive click-bait. It’s your job as a trader to remain objective.
Bloomberg published an article explaining that “a mere 10 stocks accounted for all of the S&P 500’s gains in the first half of 2018”. This is supposed to make breadth seem “bearish.

This post from AQR is worth reading. It basically states that a few big stocks ALWAYS contribute the majority of the S&P 500’s gains. There’s nothing “surprising” or bearish about this.

1 am: ISM Manufacturing is still trending higher. A medium-long term bullish sign for the stock market
Yesterday’s ISM Manufacturing reading went higher.

This is a medium-long term bullish sign for the U.S. stock market and economy. Historically, ISM Manufacuring always trends lower before a bear market and recession begins. ISM Manufacturing is trending higher right now.

1 am: As expected, corporate buybacks are putting a floor under the stock market.
CNBC has noted a phenomenon that we’ve talked about for a few months here at BullMarkets: corporate buybacks are putting a floor under the stock market.

Stocks right now are boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record.

Arguing who is “smart money” and who is “dumb money” is meaningless. The more important point is that:

  1. Individual investors are fickle. Their market outlook sways with the wind. Selling today, buying tomorrow. Meanwhile…
  2. Corporate buybacks are more consistent and have been a a nonstop source of demand in 2018. Corporate buybacks will probably continue to surge for the rest of 2018.

Corporate buybacks have surged year-to-date whenever the stock market fell. However, the interesting point is that corporate buybacks are surging on smaller and smaller declines in the stock market.

  1. The stock market fell -11.8% in January/February 2018. Corporate buybacks surged and put a floor in the stock market.
  2. The stock market fell -8.8% in March. Corporate buybacks surged and put a floor in the stock market.
  3. The stock market fell -3.5% recently. Corporate buybacks surged again.

In other words, this “buy the dip” mentality from corporate buybacks has become stronger and stronger. Corporations are waiting for smaller and smaller declines before they buy the dip.
Read Stocks on June 29, 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 1-2 years 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 significant correction at this point in time. I ignore small corrections. I only sidestep significant 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. Thanks Troy, I thought your model was 100% UPRO not SSO. Is this a recent change or a typo?
    Cheers MC

    • Hi Mick.
      The Medium-Long Term Model’s returns are based on calculating UPRO. That hasn’t changed.
      The only change is that I’m long SSO instead of UPRO.

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