Stocks on June 16, 2018: weekend 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. I update this webpage throughout the day.

Thoughts

  1. The High Yield Spread and Investment Grade Spread are diverging. Suggests that the bull market in stocks doesn’t have many years left.
  2. Industrial Production growth fell a little, but is still trending higher. A medium-long term bullish factor for the stock market.
  3. Study: this week is options expiration week. A short term bearish sign for the stock market.
  4. Margin debt continues to trend higher and is near all-time highs. NOT medium-long term bearish for the stock market.

Read Study: what happens next to stocks when tech massively outperforms utilities and consumer staples
Read Study: silver just crashed. Long term bearish for gold and silver
9 am: The High Yield Spread and Investment Grade Spread are diverging. Suggests that the bull market in stocks doesn’t have many years left.
The High Yield Spread and Investment Grade Spread usually move in sync, but recently they have been moving in opposite directions. The High Yield Spread has been going down while the Investment Grade Spread has been going up.


This is highly unusual, especially when the stock market is going up. The last time this happened while stocks were going up was in September 1999, 6 months before the bull market peaked in March 2000.
Data on this bearish pattern is limited (only goes back to 1997), and in light of all the other medium-long term bullish studies, I wouldn’t read too much into this. But it is worth noting.
Part of me wonders if this has something to do with Trump’s corporate tax cut. A lot of companies held investment grade corporate bonds in their offshore holdings, and now that they’re repatriating that cash back home, they need to sell those corporate bonds to repatriate cash.
If that is the case, then this most certainly is not a medium-long term bearish factor for the stock market. It’s merely a temporary distortion caused by the tax cut and capital repatriation.
1 am: Industrial Production growth fell a little, but is still trending higher. A medium-long term bullish factor for the stock market.
The latest reading for Industrial Production came in a little worse than expected. The year-over-year change in the manufacturing component of Industrial Production fell a little: from +2.1% to +1.9%

However, the key point is that the year-over-year change in Industrial Production: Manufacturing continues to trend higher. The year-over-year change tends to trend downwards before an equities bear market or economic recession begins.

The economy and stock market move in the same direction in the medium-long term. Industrial Production confirms other U.S. economic data, which states that the U.S. economy is strong right now. This is medium-long term bullish for the U.S. stock market.
1 am: Study: this week is options expiration week. A short term bearish sign for the stock market.
This week was June options expiration week. Historically, the stock market has a bearish tendency to fall the week after options expiration week. This bearish tendency is particularly pronounced in the Dow (large cap).
See the Dow’s 1 week forward performance.

See the S&P 500’s 1 week forward performance:

This fits with several short term bearish studies that we published last week, which suggested that the stock market would either swing sideways or pullback in the next 1-2 weeks. So far that short term outlook has played out. The S&P has swung sideways over the past week.

I expect this short term weakness to be over in a week or two.
1 am: Margin debt continues to trend higher and is near all-time highs. NOT medium-long term bearish for the stock market.
Margin debt for the U.S. stock market continues to trend higher and is near all-time highs.
But as you can see from the following chart, margin debt and the stock market almost always move in the same direction. Hence, new highs in margin debt is not medium-long term bearish for the stock market. Being bearish on stocks because margin debt is going up is akin to being bearish on stocks just because stocks are going up. That’s nonsensical.

Read Stocks on June 15, 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.

1 comment add yours

  1. This coming week sounds like a good ADD to SPX POSITIONS WEEK.

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