Stocks on June 4, 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. Italian crisis won’t trigger a global crisis, stock market crash, and economic recession.
  2. Stock market hasn’t gone up on strong earnings. Not a bearish sign for the stock market.
  3. FANG stocks continue to lead the stock market.A medium term bullish sign for the stock market.

Read Study: NASDAQ leading the S&P is a bullish sign
Read State of the U.S. economy in June 2018
1 am: Italian crisis won’t trigger a global crisis, stock market crash, and economic recession.
Facts > opinion.
The bears fear that Italian uncertainty could = Italy leaving the EU, which would kill the European economy, which would cause shock waves in the global economy, which would kill the equities bull market. This is a highly unlikely scenario. This little known part of the Italian constitution makes it almost impossible for Italy to leave the Euro. From Business Insider:
“The Italian constitution forbids referendums dealing with international treaties. That means that the country’s constitution would need to be changed before a referendum could be held on EU and euro membership. A two-thirds majority in the lower house of Italy’s parliament is needed to change the constitution. Such a majority looks highly unlikely right now, even if the Northern League and Five Star Movement increase their vote share in any future election.”
1 am: Stock market hasn’t gone up on strong earnings. Not a bearish sign for the stock market.
Q1 2018 saw very strong earnings growth, yet the stock market barely went higher. The bears see this as a bearish sign for the stock market. It isn’t.

The chart below demonstrates that stocks haven’t really been rising on strong earnings since Q2 2017. So this isn’t a new phenomenon: it’s been going on for several quarters.

Yet the stock market is up significantly from Q2 2017. As you can see, the stock market’s reaction to earnings season isn’t very useful for predicting the stock market’s future direction.

1 am: FANG stocks continue to lead the stock market. A medium term bullish sign for the stock market.
FANG stocks (Facebook, Amazon, Netflix, and Google) continue to lead the stock market higher. This is a bullish sign for the stock market. A broad equities bull market is intact as long as the leaders continue to lead, which they are right now. High growth stocks (e.g. FANG) tend to lead as long as the broad equities bull market continues, REGARDLESS of valuation. E.g. Netflix has been consistently overvalued over the past 10 years, but it hasn’t stopped going up because:

  1. The S&P 500 has been in a bull market, and…
  2. Netflix has sustained its above-average growth rate.


It is perfectly normal for a few large companies to account for the majority of the stock market’s returns.
Read Stocks on June 1, 2018: outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P has made a 6%+ “small correction”. This will not turn into a “significant correction”.
  2. 2018 will trend higher but will also be a choppy year.
  3. 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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