Stocks on April 23, 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. The surge in interest rates means that the stock market will be volatile. Not necessarily bearish.
  2. Companies are exiting the blackout window in May. A medium term bullish factor for the stock market.
  3. Now the second longest expansion without a recession. Can’t be used to time the next bear market.
  4. Companies are beating earnings expectations despite very high bars.

4 pm: The surge in interest rates means that the stock market will be volatile. Not necessarily bearish.
Everyone seems to be fixated on rising interest rates right now. The 10 year yield almost hit 3%. Here’s an article from CNBC:

When the 10 year Treasury yield rises 0.6% in 5 months, the S&P 500 is negative more than 70% of the time. This has happened 15 times since 1998.

Sounds bearish? Here’s the key line:

The average pullback is just 0.3 percent.

This is hardly any different from 0%. In other words, a small surge in interest rates tends to lead to an increase in market volatility. It isn’t exactly a medium term bearish sign for the stock market. Rising interest rates aren’t consistently bearish for stocks.
1 am: Companies are exiting the blackout window in May. A medium term bullish factor for the stock market.
As you probably already know, 2018 will be a record year for share buybacks thanks to the Trump tax cut. These massive buybacks = more demand for stocks in the medium term, which is bullish for the stock market.
Companies have “blackout windows”, which means that by law they are not allowed to buyback their own shares from the time their quarter ends to a few days after the earnings report is released. This is why share buyback activity tanked in April 2018 – companies are releasing their earnings reports.
Most of the big companies will have released their earnings reports and exited their blackout windows by May. Expect the surge in share buybacks to continue in May-June, which is a medium term bullish factor for the stock market.

1 am: Now the second longest expansion without a recession. Can’t be used to time the next bear market.
This is now the second longest U.S. economic expansion in history without a recession.

Bears have been using this chart for the past few years to “prove” that a bear market and recession are imminent. But notice something in the chart:

Economic expansions and bull markets are becoming longer and longer. Whereas economic expansions before the 1950s rarely lasted for more than 4 years, almost all the expansions after the 1950s lasted more than 4 years.

This means that you cannot use TIME cycles to predict when the next recession and bear market will begin. The fact that this economic expansion has lasted almost 9 years can only tell us that there aren’t a lot of years left until the next recession begins. It can’t helps us predict if the next recession/bear market will start in 2018, 2019, 2020, or even 2021.
1 am: Companies are beating earnings expectations despite very high bars.
Remember a few weeks ago when people were concerned that “the bar for earnings season has been set too high”? Well it turns out that companies are still smashing earnings expectations.
80% of companies have beat their earnings guidance and 72% of companies have beat their sales guidance.

Bearish traders point to the stock market’s lackluster response in the face of strong earnings. The S&P 500 is barely higher.

I don’t think this is a bearish sign for the stock market. This is mostly irrelevant. Price action vs. earnings season is not a consistently useful indicator for the stock market. Sometimes the stock market can be flat during a strong earnings season and then rally after earnings season is over.
In other words, earnings is not meant to be used as a short-medium term indicator for the stock market. It’s meant to be used as a long term indicator. Record earnings = a medium-long term bullish sign for the stock market.
Read Stocks on April 21-22, 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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