Stocks on April 2, 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. This is the stock market retest that we’re looking for.
  2. A breakdown below the 200sma does not mean that the stock market will crash.
  3. Soaring bond yields is not a threat to the stock market.
  4. Emerging markets are outperforming the U.S.. Suggests that a trade war is unlikely.
  5. Share buybacks are a medium-long term bullish factor for the stock market.

5 pm. This is the stock market retest that we’re looking for.
The S&P 500 has closed below its 200 daily moving average, just as these studies suggested (see here and here).
Remember, the stock market’s crash right now is part of a standard technical pattern: crash, bounce, and crash (retest). That’s the bottom for the S&P’s “small correction”.
The retest usually involves a marginal new low for the S&P 500. The purpose of the retest is to create a “capitulation low” in which sentiment becomes extremely pessimistic. Sentiment is a contrarian indicator.
So although the S&P might make a marginal new low vs its February 9 low of 2532, the short term risk:reward is getting very bullish. The medium-long term risk:reward is even more bullish.

1 am: A breakdown below the 200sma does not mean that the stock market will crash.
With the S&P about to breakdown below its 200sma, the bears are arguing that a market crash will follow next. “Every single bear market in history has included a breakdown below the 200 day moving average”.
That’s true, but not every single breakdown below the 200 day moving average was followed by a crash. In fact, more often than not the 200sma has been a good medium-long term BUY price.
The 200sma has no predictive value for the medium-long term. It is an irrelevant factor.

1 am: Soaring bond yields is not a threat to the stock market
Investors and traders were concerned in February that surging interest rates would crush the stock market.
We already demonstrated that rising interest rates aren’t consistently bearish for the stock market.
More importantly, it’s hard for interest rates to rise significantly right now.

  1. Inflation is not “surging” (contrary to what most traders expected).
  2. The smart money is very bullish on Treasury bonds (bearish on interest rates).

Commercial hedgers are extremely bullish on the 10 year Treasury bond and bearish on interest rates right now.

Rising interest rates is not a medium-long term bearish factor for the stock market right now.
1 am: Emerging markets are outperforming the U.S.. Suggests that a trade war is unlikely.
Emerging markets have outperformed the U.S. stock market throughout 2018.

This suggests that the probability of a trade war is low. Emerging markets should crash more than the U.S. in a trade war. In the event of a real trade war, emerging markets have much more to lose than the U.S. because they are net exporters while the U.S. is a net importer.
Trade war threats are not a medium-long term bearish factor for the stock market.
1 am: Share buybacks are a medium-long term bullish factor for the stock market.
When the stock market is going down, don’t forget that 2018 will likely witness a record number of M&A deals and share buybacks.
These companies are using Trump’s tax cuts to “buy the dip” in their own stocks. This constant buy the dip mentality is partially why this “small correction” isn’t turning into a “significant correction”.

Read Stocks on March 31 – April 1, 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.
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.

15 comments add yours

  1. is the bloodbath over? Any analysis on how the market usually does over the next few days once it’s dropped below the 200 SMA?

    • Hi Ahmad,
      That study is coming tomorrow. Conclusion:
      1. Not the start of a bear market.
      2. Most likely not a significant correction. Probably marginal new low vs Feb 9, but that’s about it.

      • Did we make the new low that we were looking for? Or do we expect it to go even lower?

        • Most likely scenario is a marginal new low vs Feb 9 (so a little more down). But that’s why I usually refrain from predicting the short term and exact price targets. It’s impossible to be both consistent and accurate.

  2. Troy, would it be fair to say that this is a good time to be greedy, since others appear fearful? Thanks!

      • Is it a bad idea to be greedy with UPRO 3x leverage instead of SSO 2x leverage?

        • Hi Alex,
          Historically it’s best to use UPRO. UPRO delivers optimal returns. But SSO’s returns are good as well, but the downside is less. I’m at a point in my career where I want to focus a little more on reducing risk. It’s really just up to your own financial circumstances.

  3. Wherever it falls this week, so be it. I am by far not as smart as you, but I was waiting todays bloodbath impatiently, as the retest had NOT happened before today (on March 23 S&P closed razor-thin ABOVE the Feb. 8 low, so the deeper trough was expected and even welcomed). Your daily warnings came true that this ongoing flirting with 200 sma should eventually break through, you were right again.
    Even the CNBC reviewers after hours who are usually keen to aggravate the hysteria the on the days like this one couldn’t find a reasonable excuse (other than Trump’s tweet on Amazon – ha!), and sounded bullish in the med-term.
    My question and concern is the following. Once this second wave is over and we have a rally, do you think that we will be out of the woods for this correction? You wrote the other day that the corrections don’t make triple bottoms – do you stick to that opinion? And what a percentage gain off the bottom you would consider a rally and not a blip?

    • Yes I think so. A triple bottom is rare (eg 2015-2016 was a big quadruple bottom, which is even rarer).
      Can you please clarify that last question?

      • I meant that, if we see a chart where the 2nd bottom is made, we should quantify when we can say that it was made indeed. Say, S&P closed at X on Monday and at X+Y% on Tuesday – mathematically, if Y>0, X was a bottom, and if we believe that corrections make only up to 2 bottoms – we can sigh with relief… but in reality, if Y is, say, only 0.01% – we cannot seriously say that we are safely off the bottom. So my question is – how do you think, what is Y% to state: “yes, the bottom was indeed made on Monday”? Sorry if it sounds very academic!

    • It’s a set of conditions, not just magnitude. But generally significant corrections are more than 14 or 15%

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