Stocks on October 12, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades. Go to the blog 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. Rising interest rates are not hurting the stock market or economy.
  2. VIX is in backwardation. Stock market is close to bottoming.
  3. Freight Transportation Services Index is trending higher. A medium-long term bullish sign for the stock market.
  4. Initial Claims are still trending downwards. But watch out if this starts to trend upwards.
  5. Continued Claims are still trending downwards. But watch out if this start to trend upwards.

Read Gold broke out, but don’t be a long term bull
Read Stock market crash: time to buy stocks?
1 am: Rising interest rates are not hurting the stock market or economy.
The mainstream story is that “rising interest rates caused this stock market crash”. In reality, that is not true. Rising interest rates are only the trigger/excuse. If rising interest rates “caused” the stock market’s crash, then there should be no reason for why stocks tend to go up more often than down when interest rates rise.
The “reason” (if any, because most short term movements are random) is more likely due to the stock market’s extremely low volatility in September, which led to a volatility explosion this month.
Even Bloomberg itself admitted “there is little evidence that rates are too tight given current economic conditions”.
As we’ve said before, financial conditions are still extremely easy and conducive of more stock market gains. Bloomberg echoed this thought.

Moreover, the inflation-adjusted Fed Funds Rate is still negative….

… whereas the inflation-adjusted 10 year yield is barely above zero.

1 am: VIX is in backwardation. Stock market is close to bottoming.
The VIX futures curve is usually in contango, whereby the spot price is lower than future prices. This is because traders generally expect volatility to increase as time goes on.
The VIX futures curve is currently heavily in backwardation, whereby the spot price is higher than future prices. VIX is rarely in backwardation. Backwardation is historically a bullish sign for the U.S. stock market.

When VIX is in backwardation like today:

  1. The stock market’s bottom is either already in, or…
  2. The stock market’s bottom is very close.

Short term risk:reward increasingly favors the bulls.
1 am: Freight Transportation Services Index is trending higher. A medium-long term bullish sign for the stock market.
The Freight Transportation Services Index measures the volume of the movement of freight in the U.S. This indicator tends to flatten or fall before an equities bear market or economic recession begins.

The latest reading for the Freight Transportation Services Index increased a little (from 135.2 to 135.3). However, the key point is that this is still trending higher. This suggests that the bull market in U.S. stocks will continue.

1 am: Initial Claims are still trending downwards. But watch out if this starts to trend upwards.
Yesterday’s reading for Initial Claims went up a little from its previous reading (from 207k to 214k). But the key point is that Initial Claims are still trending lower right now.

*Initial Claims lead the economy and stock market. Historically, its trends 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.

Flipping the Initial Claims axis makes the inverse relationship between Initial Claims & the S&P very clear.

1 am: Continued Claims are still trending downwards. But watch out if this start to trend upwards.
Yesterday’s reading for Continued Claims went up a little from its previous reading (from 1.656 million to 1.66 million). But the key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued 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.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

Read Stocks on October 11, 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. I have been long the S&P 500 since September 7, 2017 when it was at 2465.

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