Stocks on April 14-15, 2018: weekend 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 high yield spread is making a new low. A medium-long term bullish sign for the stock market.
  2. Correlations between stocks are spiking. A medium term bullish sign for the stock market.
  3. Sentiment is becoming more and more bullish. The stock market’s short term downside is limited.
  4. Stocks can’t rise on earnings beats. A short term bearish factor for the stock market.
  5. Consumer sentiment continues to trend higher. A medium-long term bullish factor for the stock market.

April 15: The high yield spread is making a new low. A medium-long term bullish sign for the stock market.
The U.S. High Yield Spread for low grade bonds is making new lows despite the stock market’s correction.

This implies that a bear market is not about to begin. Historically, the High Yield Spread went up for months before a bear market and recession began.
We are watching out for a sustained rise in High Yield Spreads right now since they are extremely low right now.
April 15: Correlations between stocks are spiking. A medium term bullish sign for the stock market.
The average 3 month rolling correlation between stocks has soared since the beginning of this year.

As you can see, historical surges in stock correlation have coincided with big medium term bottoms in the S&P 500. This is a medium term bullish sign for the stock market.
April 14: Sentiment is becoming more and more bullish. The stock market’s short term downside is limited.
AAII is one of the best sentiment indicators for the U.S. stock market. AII’s Bull Ratio is sinking right now (currently at 38).

A Bull Ratio below 35 is a good medium term bullish sign. The Bull Ratio will reach 35 if the stock market falls even a little more. This suggests that the stock market’s short term downside risk, although present, is limited.
April 14: Stocks can’t rise on earnings beats. A short term bearish factor for the stock market.
JP Morgan, Citigroup, and Wells Fargo all released their earnings reports on Friday. All 3 of these earnings reports beat estimates, but the finance sector still fell. Here’s XLF, the finance sector ETF.

This suggests that stocks won’t rise by much even if companies beat their earnings estimates. This is a short term bearish factor for the stock market and supports the case that the S&P 500 will retest its February 9, 2018 lows.
April 14: Consumer sentiment continues to trend higher. A medium-long term bullish factor for the stock market.
The latest reading for the University of Michigan’s Consumer Sentiment fell a little from the previous month. However, the overall trend in the data is still going upwards.


Consumer Sentiment is a leading indicator for the U.S. economy and stock market. This is a medium-long term bullish sign for the U.S. economy and stock market since it is still trending upwards right now.
Read Stocks on April 13, 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.

7 comments add yours

  1. Lovely post.
    Troy, I don’t understand this obsession with retesting the lows. Why?

    • Hi Ahmad,
      It’s not an obsession. Just presenting the short term outlook and medium-long term outlook.
      1. There’s a >50% chance the S&P makes a retest in the short term. This is not a 100% chance. Far from it.
      2. The medium term and long term are decisively bullish.
      Regards,
      Troy

      • Hi Troy,
        Pardon my ignorance.
        Perhaps I wasn’t clear; what I am wondering is why is this even a factor? is there a historical reason behind this? Do past corrections “retest” generally?
        For someone who isn’t a finance guy, this just seems rather arbitrary?
        Thank you so much for presenting your outlook.

        • Hi Ahmad,
          Historically, the S&P tends to crash, bounce, and retest (making a marginal new low on the retest).
          This pattern is important to short term traders but not to medium term traders. Short term: market has downside risk. Medium term: downside risk is small, so might as well go long now. Because the short term case might not play out.

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