Stocks on October 11, 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.
The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

  1. Fear & Greed Index (Sentiment Indicator) registers extreme fear.
  2. Conference Board’s Leading Economic Index continues to trend higher. Medium-long term bullish for the stock market.
  3. Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.
  4. Really interesting post from Ed Yardeni.

Read How much more can stocks fall?
Read Stock market crashed! What’s next (hint, don’t panic)
1 am: Fear & Greed Index (Sentiment Indicator) registers extreme fear.
CNN’s Fear & Greed Index (a sentiment indicator) is registering extreme fear right now.

Here’s how low this is.

This tells you that the short term risk:reward increasingly favors bulls. The stock market might fall some more, but if you’re short, now is the time to take profits.
1 am: Conference Board’s Leading Economic Index continues to trend higher. Medium-long term bullish for the stock market.
In times of market turmoil, it’s important to remember the stock market’s long term and medium term direction. That way you don’t become confused by the short term fluctuations.
The Conference Board’s Leading Economic Index continues to trend higher. Historically, this was a long term bullish sign for the stock market. The Leading Economic Index trended lower before bear markets and recessions started.

1 am: Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.
Perhaps this explains the recent stock market mini-crash.

Late-September to the end of October is the “blackout period” for stock buybacks. A “blackout period” = 5 weeks before an earnings report during which companies aren’t allowed to buy back their stocks.
*Earnings season is in the second half of October.
As you probably know, share buybacks have SOARED this year, putting a floor under the stock market. With the absence of share buybacks right now, the stock market is experiencing short term weakness. Once buybacks resume in November…. you put 2 and 2 together.
Remember this study from last week:
The stock market usually rallies after a midterm election (e.g. November 2018).

But the stock market also usually experiences some short term weakness before the election.

1 am: Really interesting post from Ed Yardeni:
I don’t read a lot of stuff from other people: most of it is noise and fear mongering (because bad news sells). But one of the few I do is Ed Yardeni.
Ed published a really interesting post on why the China-U.S. trade war isn’t going to be resolved any time soon.
Some key takeaways:

  1. Trump’s trade war with China isn’t even about trade. Nor is it about “intellectual property rights”. Those are just surface-level arguments.
  2. Trump’s trade war is about stopping China’s superpower ambitions: as evidenced by its moves to control the South China Sea, to build the “Silk Road” linking China to Europe by way of Central Asia, and to exploit the resources of Africa.
  3. All of China’s ambitions are funded by money. What better way to stop or slow down China than to go after China’s wallet?
  4. If Trump slaps a permanent 25% tariff on Chinese goods, then manufacturers would be forced to move out of China into other countries (e.g. Vietnam, Cambodia, Mexico, Latin America).
  5. Thus, China’s wallet takes a permanent hit, crippling its superpower ambitions.

This seems like a very plausible theory to me, and one which I had not really considered before (and neither did Yardeni – this is his new hypothesis).
Trump’s actions support this hypothesis. So far, Trump has demanded nothing from China. China offered trade concessions, and Trump rejected all of them. This is very different from the U.S.-NAFTA trade war, in which Trump made clear which concessions he wanted.
In other words, Trump’s administration doesn’t want to negotiate. This is his long term strategy play.
Read Stocks on October 8, 2018: outlook

Outlook

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

  1. The S&P 500 has approximately 1 year left in this bull market (bull market top sometime in 2019).
  2. I will scale out of my long positions throughout 2019 (see why)

I am 67% long SSO right now (2x S&P 500 ETF) because my Medium-Long Term model does not foresee a big correction or bear market at this point in time. (This is a step down from being 100% long SSO previously). I ignore small corrections. I only sidestep big corrections and bear markets.
The Medium-Long Term Model has been bullish since February 8, 2016 – present.

4 comments add yours

  1. TROY, why did you change from 100% SSO to 67% if your medium term model says no big correction is coming?
    john

    • Because based on where the Medium-Long Term Model is right now, we’re not very far from the bull market top, so reducing risk exposure (this was done about a month ago)

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