Stocks on May 25, 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. Initial Claims went up but are still trending lower. Medium-long term bullish for the stock market.
  2. VIX is approaching its support zone. A short term bearish factor for the stock market.
  3. Breadth continues to make a new high. A long term bullish sign for the stock market.
  4. M&A is booming. We are in the final few years of this bull market.

3 am: Initial Claims went up but are still trending lower. Medium-long term bullish for the stock market.
The latest reading for Initial Claims went up from the previous week’s reading.

But the key point is that Initial Claims are still trending lower right now.
*Initial Claims lead the economy and stock market. Historically, Initial Claims trended 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.

3 am: VIX is approaching its support zone. A short term bearish factor for the stock market.
VIX has given up most of its gains since January 2018. It is approaching its lower-bound.

Remember that the road to a new all time high for the S&P 500 is rarely smooth. There will be pullbacks along the way. With VIX approaching its lower bounce of $10-$12, we can expect a small pullback for the S&P 500 soon.
3 am: Breadth continues to make a new high. A long term bullish sign for the stock market.
The NYSE’s cumulative Advance-Decline line (breadth indicator) continues to make a new high.

Some investors claim that this isn’t necessarily bullish for the stock market in the medium term. That may be true. However, this is certainly a long term bullish indicator for the stock market: it suggests that the bull market’s top isn’t in. Historically, the cumulative Advance-Decline line trends down before a bear market begins (see study)
3 am: M&A is booming. We are in the final few years of this bull market.
The number of M&A deals is booming, particularly outside of the U.S.

M&A deals tend to surge for a few years before the equities bull market ends. Since this is the first year with surging M&A deals, we can approximate that this bull market still has 1-2 years left. This is typical late cycle behavior.
Read Stocks on May 24, 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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