Stocks on April 16, 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. Hedge fund leverage is falling. A medium-long term bullish factor for the stock market.
  2. The stock market is always falling in the last hour of trading. A short term bearish sign.
  3. PIMCO is lying: they are bullish on the bond and stock market.
  4. Interest rates haven’t broken out yet. Not yet a medium term bearish factor for the stock market.

4 pm: Hedge fund leverage is falling. A medium-long term bullish factor for the stock market.
One of the biggest concerns during the stock market’s rally in 2017 was that hedge funds were drastically increasing their leverage. (Hedge funds are seen as “speculators” or “dumb money”).
The stock market’s recent correction has caused hedge funds to drastically to reduce their leverage. Hedge fund leverage is now more normal and inline with the 2010-2015 period.

This is what corrections in bull markets are supposed to do: mean-revert certain aspects of the market that have gone too far. Zerohedge assumes that the recent decline in leverage is reminiscent of 2007. It isn’t.
There’s a big difference between the stock market in 2007 and today. The economy was deteriorating significantly by 2007. The economy is growing today. Here’s a simple chart demonstrating the difference via New Home Sales. The economy and stock market move in sync over the medium-long term.

Hedge funds’ reduction in leverage is a medium-long term bullish factor for the stock market.
1 am: The stock market is always falling in the last hour of trading. A short term bearish sign.
Over the past week the stock market has always been falling towards the close of the trading day.
Here’s a chart for the S&P 500.

This is a component of the Smart Money Index, which states that “the smart money trades in the last hour of each trading day”. The smart money selling each day is a short term bearish sign for the U.S. stock market. It supports the case that the S&P 500 still has some short term downside.
However, we’ve shown that the short term downside, although present, is limited. The medium-long term outlook is decisively bullish.
1 am: PIMCO is lying: they are bullish on the bond and stock market
PIMCO recently said that they are shedding long term bonds because “inflation is on the upswing, which will hurt the bond market and stock market significantly”. But as always, actions speak louder than words. In terms of actions, PIMCO is actually very bullish on long term bonds. They have significantly increased their exposure to long term bonds.

As you can see, you can never trust what people say on CNBC. They often say something while doing something else. This is purposeful of course. If PIMCO says that “investors should sell bonds and stocks” and investors do sell, then PIMCO can buy their bonds and stocks on the cheap.
The world’s biggest bond fund is not bearish on bonds and stocks.
1 am: Interest rates have yet to breakout. Not yet a medium term bearish factor for the stock market.
Remember how everyone was afraid in January 2018 that “interest rates will surge after breaking out”? Well here’s the updated chart. Interest  rates have yet to breakout from their downtrend. There has been no surge. Rates are still stuck in a downtrend.

I think that rates will breakout on the upside, but in a slow and steady manner. Rates will not “surge” after breaking out. The bond market is dominated by massive fundamental investors and funds that do not make decisions based on support/resistance trendlines. They make decisions based on fundamentals. Technical analysis is primarily used by smaller traders who can afford to be nimble and have a poor grasp of the fundamentals.
With that being said, the 10 year yield breaking out on the upside is not a medium-long term bearish factor for the stock market. Historically, rising rates is not bearish for stocks until the 10 year yield gets to at least 4.5%.
Read Stocks on April 14-15 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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