Stocks on June 22, 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. Mortgage rates are rising, but are still pretty low. Another housing-induce stock market crash is unlikely.
  2. China probably can’t use its Treasury holdings as leverage in a trade war.
  3. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  4. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Read Study: the Dow has gone down 8 days in a row. Medium-long term bullish for stocks
Read Study: the U.S. Dollar is overbought. Not necessarily bearish for the USD
1 am: Mortgage rates are rising, but are still pretty low. Another housing-induce stock market crash is unlikely.
I see scary-looking headlines like this all the time: “mortgage rates are at the highest level in 2 years”.

But as always, a little perspective is important. While it’s true that mortgage rates have been rising, they are still very low (historically speaking). Nothing that we haven’t seen before in this economic expansion.

With interest rates still so low, default rates on mortgages are still going down.

That’s why another housing-induced stock market crash like 2008 is unlikely to happen right now. Recency bias is something that investors and traders should avoid. The mortgage and real estate markets today are much healthier than they were in 2008.
1 am: China probably can’t use its Treasury holdings as leverage in a trade war.
Investors know that China can’t match the U.S.’ tariffs dollar for dollar – the U.S. simply doesn’t export enough to China. That’s why some investors think that China will retaliate by dumping U.S. Treasuries.
For starters, it’s not even clear that China’s dumping of U.S. Treasuries will cause interest rates to spike. China dumped $200 billion of U.S. Treasuries in late-2015 because China needed to defends it currency. In other words, this episode has played out before.
What happened to U.S. interest rates?
They remained unchanged. People tend to exaggerate the influence that China has on the U.S.

But here’s the more important thing: China probably can’t use its Treasury holdings as leverage.
China runs a massive trade surplus with the rest of the world. And since China’s currency does not float freely in the markets, the Chinese government takes in massive amounts of foreign currencies (e.g. USD). So by the sheer volume of China’s trade surplus, China’s government doesn’t really have much of a choice except to buy U.S. assets (e.g. U.S. Treasuries). They can’t just leave hundreds of billions of dollars in cash lying around.
That’s why China is so hesitant to fire this bullet. They’re in a pickle.
1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
The latest reading for Initial Claims went down from the previous week’s reading (218k vs 221k). The key point is that Initial Claims are still trending lower right now.

*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).
We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Initial Claims. A downwards trending Initial Claims = medium-long term bullish for the stock market.

1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Continued Claims went up a little bit from the previous week’s reading (1.723 million vs. 1.701 million). But the key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

Read Stocks on June 21, 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.

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