Stocks on May 24, 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. New Home Sales are still trending higher. A medium-long term bullish factor for the stock market.
  2. Reducing bank regulations = medium-long term bullish for the economy and stock market (for now).
  3. Fears of a “surge” in interest rates are overblown. Rates and the stock market are moving higher together.

Read Study: slowing global economic growth IS NOT bearish for U.S. stocks
1 am: New Home Sales are still trending higher. A medium-long term bullish factor for the stock market.
New Home Sales’ latest reading fell a little from 672k to 662k. But more importantly, New Home Sales are still trending higher. This is a medium-long term bullish sign for the stock market.
*New Home Sales tend to fall for 1-2 years BEFORE the equities bull market ends. We are watching out for signs of sustained deterioration in New Home Sales. There have been none so far.

1 am: Reducing bank regulations = medium-long term bullish for the stock market and economy (for now).
Congress approved a rollback on part of the the Dodd-Frank Legislation that placed significant restrictions on U.S. banks. From the New York Times:

The legislation will leave fewer than 10 big banks in the United States subject to stricter federal oversight, freeing thousands of banks with less than $250 billion in assets from a post-crisis crackdown that they have long complained is too onerous.

Here at Bull Markets we try to avoid political “right/wrong” statements and look at things objectively. The rollback of Dodd-Frank will likely cause lending standards to ease even further.

Easing lending standards is a medium-long term bullish sign for the stock market and economy. It gives this aged economic expansion a little more juice via easier loans and more credit.
This economic expansion might end in a debt implosion but for the time being, this economic expansion has been injected with a little more life.
1 am: Fears of a “surge” in interest rates are overblown. Not a medium-long term bearish factor for the stock market right now.
1 am: Fears of a “surge” in interest rates are overblown. Not a medium-long term bearish factor for the stock market right now.
Every day I see analysts drawing trendlines and proclaiming “if X% is broken then interest rates will surge in this secular bond bear market”.
While I do agree that interest rates are on the long term upswing, I don’t think rates will rise significantly. More importantly, using trendlines to predict interest rate breakouts is just lazy analysis.
This post explained my rationale behind why Inflation will rise, but not significantly. Inflation = the fundamentals that drive interest rates in the long term, not trendlines on a chart. It’s also important to remember that no bull/bear market occurs in a nonstop line. Yes, interest rates are in a bull market. But rates will have corrections along the way. Interest rates didn’t go down nonstop during the past 30 years’ bond bull market. So there’s no reason to believe that interest rates will go up nonstop in this bond bear market.

Here’s the monthly RSI on the 2 year Treasury yield. Extremely overbought.

The Fed signaled that it will not hike rates faster than expected, even if inflation continues to rise a little (from CNBC)
The bottom line is simple. There will be no “surge” in interest rates that immediately kills the stock market and economy. The economy continues to improve, which is driving BOTH interest rates and stocks higher at the same time. Rates will slowly trend higher over time in a choppy manner.
This chart from Bloomberg demonstrates that interest rates and stocks remain positively correlated.

Read Stocks on May 23, 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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