Stocks on April 21-22, 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. Stock market fell from January – April. Not a bearish tendency for the stock market.
  2. Commercial property is flat. Implies that the bull market doesn’t have many years left.
  3. Inflation will not rise fast enough to hurt the stock market.
  4. There is a positive correlation between interest rates and stocks right now.
  5. The “student loan and auto loan” crisis is not a repeat of the 2008 crisis.
  6. The flattening yield curve is medium-long term BULLISH for stocks.

Read Study: how long does it take for a 10%+ “small correction” to make new highs
April 22: Stock market fell from January – April. Not a bearish tendency for the stock market.
This chart shows that when the Dow was negative from January to April (as it is this year), the majority of the time the rest of the year was negative too. Sounds bearish, doesn’t it?

It isn’t. The stock market closed down because the Dow was often deep in the red by April. Looking at the returns from end of April to end of December shows that this is neither bullish nor bearish for the stock market. It’s a 50-50.

April 22: Commercial property is flat. Implies that the bull market doesn’t have many years left.
Some bullish investors think that the current bull market and economic expansion can push into 2021-2022. I don’t think so. Based on the current trend in the data, I think the bull market will end somewhere around the second half of 2019, give or take half a year. 2021-2022 seems too optimistic.
The Commercial Property Price Index has been flat since mid-2016. Granted, this is not a particularly good indicator for the economy and stock market (commercial prices were flat during the 2000-2002 bear market). But it does imply that the economy is close to full capacity. Demand for commercial real estate is not rising significantly anymore.

April 22: Inflation will not rise fast enough to hurt the stock market.
Interest rates are rising right now because inflation is rising right now. The bears fear that inflation will surge, which will cause interest rates to surge, which will hurt the stock market right now. I disagree.
Inflation is rising primarily because oil is rising.

But here’s the thing. Oil’s rally is limited. Which means that inflation will also rise slowly. There won’t be a “surge” in inflation and interest rates. OPEC continues to cut production to push oil higher, but its influence is limited. The U.S. now pumps more oil than OPEC!

U.S. shale is the low-cost producer in oil. Shale production grows when oil is in the $50-$60 range. Shale production will soar when oil reaches the $70-$80 range. Hence, U.S. shale can cap oil prices, which puts a lid on inflation and interest rates. Inflation and rates won’t “soar” enough to hurt stocks in the medium-long term.
April 21: There is a positive correlation between interest rates and stocks right now.
Interest rates are rising right now, with the 10 year Treasury yield getting closer and closer to breaching the 3% level. This isn’t bearish for the stock market.

There is a positive correlation between interest rates and the S&P 500 right now.

Notice how the correlation constantly flips from negative to positive to negative to positive. Rising interest rates aren’t consistently bearish for stocks, just like how rising inflation isn’t consistently bearish for stocks.
April 21: The “student loan and auto loan” crisis is not a repeat of the 2008 crisis.
Make no mistake: the student loan crisis will probably implode one day. Young adults are literally drowning in debt thanks to skyrocketing tuition fees. But this doesn’t mean that it will be a repeat of the 2008 mortgage crisis. We need to put things into perspective.
As you can clearly see here, mortgage debt is much bigger than any other kind of debt. This means that a student loan crisis (when it does happen) will have a much smaller impact on the economy and stock market than the mortgage crisis did in 2007-2009.

April 21: The flattening yield curve is medium-long term BULLISH for stocks.
People seem to be concerned about the flattening yield curve, which is supposed to signal a recession and bear market in stocks. As we said previously, flattening yield curves typically coincide with rallies in the stock market. A flattening yield curve is not bearish for the stock market until it becomes inverted. The yield curve still has some room to go before it is inverted.
This chart shows the correlation between a flattening yield curve and stock market’s returns.

Read Stocks on April 20, 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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