Stocks on April 25, 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. Earnings expectations might fall a little throughout 2018. But that is still a bullish factor for stocks in 2018.
  2. The S&P 500 is still being supported on its rising trendline.
  3. The stock market did not fall yesterday because the 10 year yield reached 3%.
  4. There are no signs of stagflation

4 pm: Earnings expectations might fall a little throughout 2018. But that is still a bullish factor for stocks in 2018.
Some people think that earnings expectations will fall throughout the rest of 2018. This is especially because the stock market hasn’t gone up during this earnings season, despite very strong earnings. This fear is reasonable because earnings expectations almost ALWAYS fall from the beginning to end of the year.

But here’s the thing. The stock market cares about facts over the medium-long term. Even if earnings expectations fall, they will still come in comfortably above 10% for 2018 (earnings growth is currently on track for >15%).
We demonstrated that strong earnings growth is bullish for stocks in this study. This chart points to the same conclusion. When earnings growth exceeds 10% (which it will in 2018), the stock market pretty much ALWAYS goes up that year.

Remember: despite very high expectations, companies are crushing it with their earnings reports.

1 am: the S&P 500 is still being supported on its rising trendline
Despite yesterday’s selloff, the S&P 500 is still being supported on its rising trendline.

Remember the worst case scenario: a marginal new low vs the S&P’s February 9th low. (Most of these crash, bounce, and retest patterns see a marginal new low vs. the first crash’s low.) The medium term risk:reward ratio is still skewed towards the upside.
1 am: The stock market did not fall yesterday because the 10 year yield reached 3%.
Some people attribute yesterday’s stock market selloff to the 10 year Treasury yield reaching 3%. I don’t think so. This is just an excuse/trigger for the selloff.
The 10 year yield had gotten very close to 3% in the morning of April 23 (2.998%). The stock market was flat for most of April 23. The stock market only started to selloff once the 10 year yield reached EXACTLY 3% yesterday. It’s hard to imagine that investors all of a sudden woke up to the prospect of rising interest rates when rates went from 2.998% to 3% (a 0.002% increase).

This selloff on rising interest rates is probably just an excuse. It doesn’t suggest that there are any real long term macro problems. Remember, the stock market’s short term is mostly random.
1 am: There are no signs of stagflation
Danielle DiMartino Booth stated that “markets better prepare for stagflation” on Bloomberg. I respectfully disagree.
You need significantly deteriorating fundamentals + surging inflation to have stagflation, which is what happened in 2008. The financial landscape is very different today.
As mentioned, the economy is growing today. There are no major signs of economic deterioration. We can see this in New Home Sales, Industrial Production, and Initial Claims.



Inflation is rising, but is MUCH LOWER than where it was in 2008. This chart shows how the year-over-year change in CPI (inflation) exceeded 4% by the December 2007. It is currently at 2.4% today. There has been no “surge” in inflation.

The 2008 surge in inflation was primarily due to soaring oil and commodity prices (remember how oil eventually got to $140 because everyone was talking about “peak oil”?) That’s why core CPI growth was not strong in 2007-2008.

This means that inflation won’t “surge” unless oil prices surge as well to e.g. >$100. Oil prices >$100 are extremely unlikely. The world has changed. 10 years ago, everyone was talking about “peak oil”. Today, the U.S. actually produces more oil than OPEC! U.S. oil is market-driven, unlike OPEC which is a cartel. U.S. shale is very profitable anywhere above $60-70. This means that if oil prices soar, U.S. shale will massively ramp up production, which will put a lid on oil and headline inflation.
Stagflation is not a concern for the stock market in 2018.
Read Stocks on April 24, 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.

4 comments add yours

  1. Hi,
    How significant do you think the flattening yield curve is, especially between the 10 and 30?

    • Flattening yield curve is typically bullish until the curve becomes inverted. Not yet inverted. Will take at least half a year.

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