Stocks on May 23, 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. Small cap stocks are leading the stock market’s rally. Neither bullish nor bearish for the stock market (I made a mistake before).
  2. U.S. financial conditions have tightened a little in 2018. Not yet bearish for the stock market.
  3. Smart Money continues to exit the stock market. A potential bearish sign for stocks.
  4. Delinquency rates on commercial loans continue to fall. A medium-long term bullish sign for the stock market.

3 am: Small cap stocks are leading the stock market’s rally. Neither bullish nor bearish for the stock market (I made a mistake before).
Small cap stocks (Russell 2000 Index) are leading the stock market’s rally.

I said before that this is a medium-long term bullish sign for the stock market. I was wrong. Studies show that this is neither bullish nor bearish. It’s mostly irrelevant for the stock market’s (S&P 500’s) medium-long term outlook. From Mark Hulbert:

As you can see, it’s quite common for small caps (Russell) to peak after the stock market has already peaked. As Mark puts it “The bull market may be alive and well. But confirmation of its health will have to come from other indicators besides the Russell 2000 alone.”
Of more importance is the cumulative Advance-Decline line, which is a medium-long term bullish sign for the stock market right now.
3 am: U.S. financial conditions have tightened a little in 2018. Not yet bearish for the stock market.
The Goldman Sachs FCI is another popular financial conditions index. It demonstrates that financial conditions have tightened in 2018, the main drivers being higher bond yields and a higher U.S. Dollar.

But as I mentioned in a previous study, the recent tightening in financial conditions is still minuscule when you put things into perspective. Financial conditions are still too loose to induce an equities bear market or economic recession.
3 am: Smart Money continues to exit the stock market. A potential bearish sign for stocks.
This is one of the few real medium term bearish signs I’ve seen for the U.S. stock market.
The Smart Money Flow Index states that “smart money” trades during the last hour while the dumb money trades during the first hour. The Index adds the Dow’s daily close $ and subtracts the Dow’s daily 10 am price. This means that if the market opens high and closes low, the “smart money” must be selling.
The Smart Money Flow Index is still falling right now even though the Dow is above its February and April 2018 lows. This means that over the past 2 months the Dow has had a strong tendency to fall during the last hour of trading.

This is one of the few medium term bearish signs I’m looking at right now. As I mentioned before, there’s a reason to believe why the Smart Money Flow Index is no longer as useful as it used to be. In addition, the Smart Money Flow Index relies on the Dow, which has been weaker than the S&P 500 year-to-date.
There will never be a time in which 100% of the factors are bullish or 100% of the factors are bearish. What matters is that the majority of medium term factors for the U.S. stock market are bullish right now.
3 am: Delinquency rates on commercial loans continue to fall. A medium-long term bullish sign for the stock market.
The latest update for Q1 2018 demonstrates that delinquency rates on commercial loans are still falling.

This is a medium-long term bullish sign for the stock market. Historically, delinquency rates rise before an equities bear market or economic recession begin.
Read Stocks on May 22, 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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