Stocks on June 18, 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. I update this webpage throughout the day.

Thoughts

  1. U.S. stock market has started to diverge from Investment Grade Spreads. Suggests that the bull market only has 1-2 years left.
  2. Why stock market investors and traders need to have a good understanding of the economy.
  3. Q2 GDP is going to be extremely strong. A medium-long term bullish sign for the stock market and economy.
  4. The stock market’s rally isn’t widespread. Not a bearish sign for stocks.

Read Study: why small cap stocks will probably continue to outperform large cap stocks
Read Stock market’s medium term outlook is bullish, but the bull market only has 1-2 years left
4 am: U.S. stock market has started to diverge from Investment Grade Spreads. Suggests that the bull market only has 1-2 years left.
The U.S. stock market and Investment Grade Spreads (inverted) tend to move in the same direction. But recently these 2 markets have diverged.

The last time this happened was in 1998, less than 2 years before the bull market peaked in March 2000. This suggests that the equities bull market doesn’t have many years left.

1 am: Why stock market investors and traders need to have a good understanding of the economy.
I frequently say here on the BullMarkets blog that “the economy and stock market move in the same direction”. Here’s the chart to prove it.

The Wilshire 5000 is an index of all active stocks in the U.S. stock market, which makes it broader than the S&P 500. As you can see, bear markets and big declines in the stock market rarely happen outside of economic recessions.
But you can also see that the stock market usually tops before a recession begins. That’s why we use leading economic indicators. The usual chain of events goes like this:

  1. Leading indicators start to deteriorate.
  2. The stock market tops and starts to fall.
  3. The economy peaks and a recession begins.

Right now the leading economic indicators point to continued growth. That’s why this bull market and rally aren’t over.
1 am: Q2 GDP is going to be extremely strong. A medium-long term bullish sign for the stock market and economy.
The Atlanta Fed’s GDPNow expects Q2 2018 GDP to come in at 4.8%. This is the highest level of GDP growth in years.

The Atlanta Fed’s estimates are extremely accurate. Over the past 4 years, their average estimate has been spot on.

This means that there’s a high probability Q2 GDP will actually come in near 4.8%. The strong GDP supports other economic data, which suggests that U.S. economic growth is very solid right now.
The U.S. economy and stock market move in the same direction in the medium-long term. An improving economy = medium-long term bullish for the stock market.
1 am: The stock market’s rally isn’t widespread. Not a bearish sign for stocks.
One of the biggest complaints I hear is that the stock market’s recent rally isn’t widespread – i.e. it’s primarily led by a few big name companies like FANG.
I talked about this last week and demonstrated that this wasn’t a bearish sign for the stock market:

Bearish traders right now think that the stock market’s recent rally lacks “broad support”. Only 65% of stocks are above their 200 daily moving average.


The NASDAQ has the exact same problem. The NASDAQ is making new all-time highs, yet only 59% of its stocks are above their 200 day moving average.

Seems bearish? It isn’t. A lot of rallies occur without “broad support”, even when the stock market (NASDAQ in this case) is making new highs.

It is the normal course of business for a few large companies to lift up the entire stock market while many companies languish. There’s nothing inherently wrong about this.
Read Stocks on June 16, 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.

Leave a Comment