Stocks on April 10, 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. China-U.S. negotiations will take time and heighten increased market volatility, but is not a medium-long term bearish factor for the stock market.
  2. Breadth continues to make a bullish divergence with the S&P 500. A medium term bullish sign for stocks.
  3. China is willing to make concessions amidst these tariff threats. A trade war is unlikely.
  4. China has stopped buying U.S. Treasuries to retaliate against Trump’s tariffs. It’s not working.

Read Study: high volatility is not bearish for stocks
4 pm: China-U.S. negotiations will take time and heighten increased market volatility, but is not a medium-long term bearish factor for the stock market.
Bloomberg wrote an excellent piece titled “China talks stalled over Trump’s demands on high tech industries“. Here are the key takeaways and my thoughts:

  1. Beijing had rejected a U.S. request to stop subsidizing industries related to its “Made in China 2025” initiative. The U.S. has accused China of using the policy to force companies into transferring technology in areas like robotics, aerospace and artificial intelligence.
  2. The U.S. demands came after Beijing offered to narrow the trade deficit by $50 billion, including by importing more liquefied natural gas, agricultural products, semiconductors and luxury goods, according to the person.

As you can see, reaching a quick deal is unlikely. It goes beyond simply reducing the U.S.’ trade deficit with China, but also slowing down the rise of China.
The good news is that it’s clear that China and the U.S. want to negotiate. These negotiations will take a few months. Every now and then one side will threaten the other in order to get the talks moving. These “threats” will probably cause the market to make a short term dip, but it is not a medium-long term concern for the stock market.
1 am: Breadth continues to make a bullish divergence with the S&P 500. A medium term bullish sign for stocks.
The NYAD Cumulative Line is a breadth indicator for the U.S. stock market. It adds the number of stocks that go up each day and subtracts the number of stocks that go down each day. This can be used as a leading indicator (see study and study).
This breadth indicator continues to make a bullish divergence with the S&P 500. The NYAD line is making “higher lows” even though the S&P 500 is close to retesting its February 9 lows. This is a medium term bullish sign for the stock market.

1 am: China is willing to make concessions amidst these tariff threats. A trade war is unlikely.
Chinese President Xi Jinping announced that China is willing to make concessions on some of Trump’s key demands:

  1. Lower China’s tariffs on foreign cars.
  2. Lower foreign-ownership limits on Chinese businesses.
  3. Protect the intellectual property of foreign companies (one of the key issues around Trump’s tirade).
  4. Expand imports.

As you can see, China wants to negotiate a deal with Trump. The odds of a full-blown trade war beyond mere threats is low. This is not a medium-long term bearish factor for the stock market.
1 am: China has stopped buying U.S. Treasuries to retaliate against Trump’s tariffs. It’s not working.
From Zerohedge:

From what we understand, the Chinese government has halted its purchases of US Treasuries. Despite the direct encouragement, according to Chinese sources, by US Treasury Secretary Steve Mnuchin for China to “stay put,” Beijing has apparently discontinued purchases of US Treasuries “for the past few weeks.”

And how is the market reacting to this? Interest rates aren’t going up as conventional wisdom would expect. Here’s the 10 year yield.

China dumping U.S. Treasuries will probably cause interest rates to rise a little bit. But considering that China owns less than 6% of U.S. federal debt, I don’t think interest rates will skyrocket. China’s threat is not a medium-long term bearish factor for the U.S. stock market.
Read Stocks on April 9, 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 also be a choppy year. There will be another correction later this year.
  3. Why I’m medium-long term bullish on the stock market from a discretionary point of view.
  4. 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. So please take my short term thoughts with a grain of salt.
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.

4 comments add yours

    • It’s a minor concern, but I don’t think it’s a major concern. If there was any substantial evidence, I think Mueller would have found it already after almost a year of investigating.

      • What would be the impact on the markets if they do find something? Can you do a study on the impact the Nixon investigation / resignation had on the markets?

        • Hi Tom.
          The stock market was in a bear market during the Nixon scandal. But that was because the economy was already in a recession.

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