Stocks on October 2, 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. More than 80% of U.S. IPO’s lose money. Why this isn’t a bearish sign for the stock market.
  2. Durable goods continues to trend higher. This confirms the bull market’s rally.
  3. ISM Manufacturing is fell a little but is still trending higher. Medium term bullish for stocks.
  4. Mergers & Acquisitions will probably boom in 2019, setting the stage for the bull market’s top.

Read RUT vs. Dow: stock market today is just like 1999?
1 am: More than 80% of U.S. IPO’s lose money. Why this isn’t a bearish sign for the stock market.
The Wall Street Journal’s latest data demonstrates that more than 80% of U.S. PO’s lost money in the 12 months leading up to their IPO’s this year. This is on part with 2000 (at the height of the dot-com bubble).
Some traders see this as a sign of exuberance. I don’t.

Something has changed. As you can see, this figure has been consistently high for 5 years in a row now. More and more IPO’s are tech companies, and tech companies generally try to figure out how to make money AFTER they IPO.
With that being said, this is definitely late-cycle behavior. But it doesn’t tell you anything about WHEN the stock market will peak.
1 am: Durable goods continues to trend higher. This confirms the bull market’s rally.
The latest reading for Durable Goods demonstrates that this data series is still trending higher.

This confirms the stock market’s rally. Historically, Durable Goods is a coincident indicator for the economy and stock market (Durable Goods, the stock market, and economy trend higher and lower together).
1 am: ISM Manufacturing is fell a little but is still trending higher. Medium term bullish for stocks.
The latest reading for ISM Manufacturing fell a little from its previous reading. However, the key point is that ISM Manufacturing is still trending higher.

This is a medium term bullish sign for the U.S. stock market. ISM Manufacturing is a leading indicator. Historically, ISM Manufacturing trends downwards before a bear market or recession begins.
1 am: Mergers & Acquisitions will probably boom in 2019, setting the stage for the bull market’s top.
Mergers & Acquisitions in the U.S. are rising right now.

M&A typically sees more of a “boom” at bull market tops. We haven’t seen that yet, but will probably see it in 2019. Keep in mind that this figure is not adjusted for inflation. So when taking inflation into considering, the value of M&A has not yet “boomed”.
*There’s an argument to be made the M&A isn’t as important for this bull market’s top vs. previous bull markets’ tops. Nowadays, companies are spending more of their cash on buying back their own stocks instead of buying other companies.
Data on M&A activity before the 1980s is rare. This is from a very old book. It demonstrates that M&A SOARED 1-2 years before the 1968 bull market top.

Read Stocks on September 28, 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.
I have been long the S&P 500 since September 7, 2017 when it was at 2465.

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