Stocks on July 31, 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. FANG’s “demise” will not crash the stock market.
  2. We continue to see sector rotation, which prevents any major problems in one sector from impacting the rest of the stock market.
  3. The stock market’s technicals suggest that the stock market’s short term downside is limited.
  4. The Chinese Yuan is extremely oversold (USDCNY is extremely overbought). A short-medium term bullish sign for gold?

Read Study: what the stock market’s recent underperformance means for stocks
Read Study: a rare bearish sign for the stock market and NASDAQ
1 am: FANG’s “demise” will not crash the stock market.
Financial media has now swung its attention to “FANG’s demise”, with scary sounding headlines such as “FANG has lost $350 billion in market value in the last week” (never mind the fact that since the U.S. stock market’s market cap exceeds 20 trillion, $350 billion is a drop in the bucket).
I don’t think FANG is “dead”, nor do I think FANG will “crash”. FANG stocks are high beta stocks, which means that they go up more when the broad market goes up and go down more when the broad market goes down. Hence, any movement in FANG will naturally seem “unprecedented” merely because these are volatile stocks.
I think that FANG’s recent decline is just a correction in a bull market, albeit a big one.
But let’s assume the worst case scenario. Let’s assume that FANG is “dead” and that they will never rise again. Does this mean that the stock market (S&P 500) will also crash?
I don’t think so. Here’s how 2000 played out.
The ENTIRE NASDAQ (not just a few big tech stocks like FANG) crashed 20-40%.

What did the S&P 500 do? It swung sideways in a big range. It did not “crash”.

That’s because no single sector, regardless of how big it is, can impact the broad stock market. The S&P 500 swung sideways in 2000 because the Dow offset the NASDAQ’s decline. This is called sector rotation.

So back to today. While FANG has “crashed”, the NASDAQ is down -3.5%. Hardly a “crash” in the overall tech sector. People tend to exaggerate FANG’s importance for the overall stock market.

This means that index investors and traders shouldn’t pay too much attention to FANG’s demise. Otherwise, you’d be joining the Dennis Gartman camp, who is “concerned about the demise of FANG’s”.
1 am: We continue to see sector rotation, which prevents any major problems in one sector from impacting the rest of the stock market.
There have been a lot of problems in 2018 so far. But none of these problems have caused the broad stock market (S&P 500) to fall significantly. This is because sector rotation has been prevalent throughout the past few months.
Remember a few months ago when the Dow (large caps) was weak because of trade war fears? People who thought that the Dow would crash the stock market were wrong – strength in NASDAQ (tech) and Russell (small caps) offset weakness in the Dow. Right now, people are afraid of FANG’s demise. However, strength in Dow is partially offsetting weakness in tech.


As you can see, sector rotation remains strong right now, which prevents a small decline in the overall stock market from turning into a big decline.
1 am: The stock market’s technicals suggest that the stock market’s short term downside is limited.
In yesterday’s market studies I said that the S&P 500 has a >50% probability it will revisit its breakout level and turn that into support. Looks like the S&P is doing that right now.

If the S&P 500 does revisit this level, I don’t think it will go much lower in the short term. Total Put/Call Ratio has spiked. If the stock market falls a little more and the Put/Call Ratio rises more to 1.3, the Put/Call Ratio will be very high.
Year-to-date, the S&P 500 has been close to a short term bottom every time the Total Put/Call Ratio reached 1.3

Another spike in the Put/Call Ratio will mean that the S&P 500’s short term bottom is very close.
1 am: The Chinese Yuan is extremely oversold (USDCNY is extremely overbought). A short-medium term bullish sign for gold?
The Chinese Yuan and gold have a very strong correlation. This is because China wants to tie its currency to gold, thereby establishing a Yuan-gold standard that can rival the U.S. Dollar.

The USDCNY is extremely overbought right now on its weekly RSI, which means that the Yuan is extremely oversold right now.

A multi-week bounce in the Yuan (multi-week pullback in USDCNY) = short-medium term bullish for gold because these 2 markets have a very strong positive correlation right now.
Read Stocks on July 30, 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. Hi Troy,
    Why are you not long since 2016 when your model gave the last Buy signal?
    Tks,
    Johan

    • I used to use a different trading model with a slightly shorter time frame. Gave up on that trading model after I found it that it couldn’t even beat the Medium-Long Term Model..

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