Stocks on April 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. I update this webpage throughout the day.

Thoughts

  1. The yield curve’s inversion will take at least half a year.
  2. Libor’s surge is not as bad for corporate America and the stock market as it sounds.
  3. Federal Reserve policy: means that this bull market in stocks has 1-2 years left at most.
  4. China is easing monetary policy. Doesn’t mean that the U.S. stock market will make a big decline.

4 pm: The yield curve’s inversion will take at least half a year.
The yield curve has been flattening once again since the stock market’s correction began in January 2018, which has investors afraid of an upcoming recession and equities bear market. I’m not concerned (yet).

  1. The difference between the 10 year and 2 year Treasury yield is 0.49% right now. Historically, it takes an average of 2 years for the differential to go from 0.5% to inverted (i.e. 0%). The minimum time is around 6-7 months.
  2. The yield curve’s inversion typically PRECEDES a bear market in stocks by many months.

This will be a medium-long term bearish sign for the stock market once it actually becomes inverted. Not quite there yet. The yield curve will probably continue to flatten throughout 2018 as the Federal Reserve hikes interest rates.

 
1 am: Libor’s surge is not as bad for corporate America and the stock market as it sounds.
Libor represents banks’ borrowing costs, and many of corporate America’s loans are pegged to this gauge. Libor continues to rise since late-2015. On the surface, it would seem like this will hurt U.S. corporate loans and the stock market in the medium-long term.

It isn’t as bad as it seems. Libor is still low when you put things into perspective.

More importantly, companies are far less exposed to Libor than they used to be. Libor primarily impacts companies’ short term loans. U.S. companies have used the low-rate environments over the past 10 years to lengthen the average duration of their loans.
In fact, short term credit market debt as a % of total credit market debt is now 14%, whereas it used to be 40-50%.

The recent surge in Libor cannot significantly hurt corporate America or the U.S. stock market in the medium-long term.
1 am: Federal Reserve policy: means that this bull market in stocks has 1-2 years left at most.
The Federal Reserve has been significantly tightening monetary policy since 2016. This cannot be used to time bull market tops. As you can see in the following chart, monetary policy can tighten significantly a 1-3 years before a bear market in stocks begins.

But this does mean that the current bull market in stocks doesn’t have much time left. 1-2 years at most.
1 am: China is easing monetary policy. Doesn’t mean the U.S. stock market will make a big decline.
China is quietly easing monetary policy, as you can see in the chart below.

Bearish traders assume that this will lead to a repeat of 2015, when the Chinese stock market crashed, China eased monetary policy, and then the U.S. stock market crashed.
There is no consistent pattern between Chinese monetary easing and U.S. stock market crashes. China eased in 2013 and 2014, but those did not cause a U.S. stock market crash.
Read Stocks on April 10, 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.

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