Stocks on April 18, 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. Housing Starts are still trending higher. Medium-long term bullish for stocks.
  2. Deqlinquency rate on subprime auto loans is surging. Not a repeat of 2008.
  3. The S&P 500 reclaimed its 50 daily moving average. An irrelevant sign for the stock market.
  4. The U.S. stock market is starting to ignore China trade war news.

1 am: Housing Starts are still trending higher. Medium-long term bullish for stocks.
Housing Starts increased last month from the previous month (1319k vs 1295k). More importantly, Housing Starts are still trending higher.

The economy and stock market move in sync over the long run. Housing is a leading indicator for the U.S. economy. Hence, an improving Housing Starts is a medium-long term bullish sign for the U.S. economy and stock market.
1 am: Deqlinquency rate on subprime auto loans is surging. Not a repeat of 2008.
The delinquency rate on subprime auto loans is surging to levels that exceed that of the Great Financial Crisis. Anything with the word “subprime” in it is used by permabears to draw parallels to the 2007-2009 stock market crash.

That’s why we have to put things in context. The auto loan market is 13% the size of the mortgage market. The subprime auto loan market is 24% the size of the total auto loan market.
In other words, the subprime auto loan market is 3% the size of the mortgage market. Yes, the subprime auto loan bust is a problem. But it is a very small and isolated problem that’s nothing similar to the mortgage market bust of 2006-2008.
This is not a medium-long term bearish factor for the stock market or economy.
1 am: The S&P 500 reclaimed its 50 daily moving average. An irrelevant sign for the stock market.
The S&P 500 and Dow Jones reclaimed their 50 daily moving averages yesterday. Some people think this is a short term bullish sign for the stock market because it means that the trend is UP. It isn’t. It’s an irrelevant sign for the stock market.

This table shows you what happens next when the Dow Jones reclaims its 50 daily moving average after falling more than 10%. The forward returns are pretty much random. This is neither a bullish nor a bearish sign for the stock market.

1 am: The U.S. stock market is starting to ignore China trade war news.
China put anti-dumping duties on imports of U.S. sorghum, a type of grain (agriculture). While this news might have caused a 1-2% decline in the U.S. stock market a few weeks ago, the market completely ignored this news yesterday. The stock market went up (instead of down).
This is a sign of bullish price action. This implies that although some short term downside exists, the stock market’s short term downside is limited. The medium-long term outlook is bullish.
Read Stocks on April 17, 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.

1 comment add yours

  1. From Kenny polcari,
    The financials – represented by the XLF ended the day flat….GS – got clobbered – investors and traders sold the daylights out of it – sending it down $4 or 1.6% after they also reported ‘blow out’ numbers. Yes, they beat on the top line and yes they killed it in sales and trading (like the rest of ‘7 families’*) – earning $2.3 bil this qtr alone vs the $1.8 bil that was expected….and that makes some sense. Look – volatility spiked and that is good for trading revenues, but when you have them (and I mean all of them) calling clients and suggesting that if they (the clients) don’t send their order flow to them – via the suite of automated algorythims provided to them on their desktop then that client just might drop off the ‘preferred client list’. (just fyi – Clients hate to be dropped off ANY preferred list).
    (*7 Families include: JPM, GS, MS, UBS, DBK, BAC, C,)
    Oh – like THAT doesn’t happen? Come on – who are you kidding…. it’s the best kept secret on the street… (wink, wink) …. a little arm bending never hurt anybody – or does it? Now before you start screaming – Slow down there big boy…..GS (along with the other 6 families) wants to be the mkt, they want customers to have to come to them – so if they capture the bulk of the order flow – they can internalize it, trade against it, spit out what they don’t want and move on….Look – they made $2.3 bil in sales and trading revenues – 27% more than they expected – or 27% more than they told the analysts they were gonna make…..Do you really think that is all just ‘commissions paid’? Dude? Really? Whatever! So, you can say good for them, but I would say it’s bad for the public mkts – BUT that is a whole other conversation.

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