Stocks on July 9, 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 Chinese stock market’s crash will not result in contagion to the U.S. like 2015
  2. Contrary to what you might think, we haven’t seen true global euphoria yet in this bull market, which suggests that the bull market’s top isn’t in.
  3. The flattening yield curve suggests that we are in the 8-9th inning of this bull market and that you should be long VIX
  4. Commercial and Industrial Loan Growth is trending higher, removing this bearish worry for the stock market.

Read Can the stock market close higher for a record breaking 10th year in a row?
1 am: The Chinese stock market’s crash will not result in contagion to the U.S. like 2015
The Chinese stock market has fallen significantly this year due to Trump’s trade war. This has investors worried about a repeat of 2015. They think that the Chinese stock market crash of 2015 caused the U.S. stock market’s “big correction” in 2015.
A repeat of 2015 is unlikely.
For starters, the Chinese stock market fell much more in 2015 than it has today. It fell -45% from June – August 2014.  Today, the Chinese stock market is down -25%. The magnitude of this decline is much smaller.

More importantly, the U.S. stock market’s “big correction” from 2015-2016 wasn’t even caused by the Chinese stock market’s crash. It was caused by the U.S. stock market’s own internal problems, as outlined by the Medium-Long Term Model. The Chinese stock market crash was merely correlation and not causation. U.S. corporate earnings fell in 2015-2016 because oil crashed, which was bearish for the U.S. stock market. U.S. corporate earnings are rising today.
1 am: Contrary to what you might think, we haven’t seen true global euphoria yet in this bull market, which suggests that the bull market’s top isn’t in. 
The following chart demonstrates Credit Suisse’s Global Risk Appetite Index. What’s particularly interesting is that we haven’t experienced “euphoria” in this bull market and economic expansion yet.

As you can see, all the other bull market tops and economic expansion tops occurred when there was global “euphoria”:

  1. 2007
  2. 2000
  3. 1990
  4. 1987

So why hasn’t there been global euphoria so far over the past 10 years? Because we have yet to see sustained global growth for a LONG period of time.
There was no synchronous global economic growth from 2010 – 2016. The U.S. economy improved while foreign economies (Europe and emerging markets) went through a series of mini-crises.
We saw some synchronous global growth in 2017, but that did not last long enough to result in global euphoria. Ex-U.S. economies have slowed down year-to-date in 2018.
In order for this U.S. bull market to end, we need to see global synchronous euphoria, which we haven’t seen so far.
1 am: The flattening yield curve suggests that we are in the 8-9th inning of this bull market and that you should be long VIX
The Treasury yield curve is a leading indicator for the stock market. With the yield curve getting close to inversion, it suggests that:

  1. The bull market in stocks still has some room to run, but…
  2. It doesn’t have a lot of room to run. We are in the late stages of this economic expansion.


VIX  tends to trend higher in the late stages of an economic expansion. For example, VIX trended higher from 1996 – 2000 (before the March 2000 top) and throughout 2007 (before the October 2007 top).

This suggests that you should be long stocks and simultaneously long VIX in the final big rally of an equities bull market.
1 am: Commercial and Industrial Loan Growth is trending higher, removing this bearish worry for the stock market.
Last year one of the biggest worries investors and traders had was that Commercial and Industrial Loan growth was trending downwards and on the verge of turning negative.

I said that Loan growth isn’t useful for predicting the stock market or economy. Its correlation with the stock market is mostly random.

  1. Sometimes bull markets end when Loan Growth is VERY HIGH.
  2. Sometimes bull markets end when Loan Growth is turning negative.

Based on the latest data, Loan Growth is now trending upwards. Hence this bearish “worry” should be removed.

Read Stocks on July 7, 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 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,
    Thank you for the awesome post, like always!
    What is, in your opinion, the best ETF to trade VIX? (VXX, VIXY?)
    Do you think ETF erosion will be a secondary factor due to the increase in volatility you expect?
    Thanks,
    JF

    • Hi JF,
      I don’t like VXX because of the ETF erosion. I’ve always been curious about VIX call options, although I haven’t looked into that.

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