Stocks on April 27, 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.


  1. Spread between S&P dividend yield – Treasury yield is falling. NOT medium-long term bearish for the stock market.
  2. The central banks didn’t “cause” the bull market. The economy did.
  3. Extremely strong earnings growth is a medium-long term bullish factor for stocks.
  4. Initial Claims just set a new low. Medium-long term bullish for the stock market.

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1 am: Spread between S&P dividend yield – Treasury yield is falling. NOT medium-long term bearish for the stock market.
The spread between the S&P 500’s dividend yield – the 10 year Treasury yield continues to drop. Bears use this to support their bearish case. It’s supposed to suggest that investors will switch from stocks to bonds.

I demonstrated in a previous study that this is not medium-long term bearish for the stock market. The 10 year yield has been above the S&P’s dividend yield throughout most of history (see study).
1 am: The central banks didn’t “cause” the bull market. The economy did.
You’ve probably seen this chart before. It implies that the bull market and economic expansion are entirely driven by central bank stimulus.
*Brought to you by Zerohedge of course.

This chart shows how all the major central banks have been on a monetary easing spree over the past 10 years.

By definition, that should imply that all stock markets soar, right? Afterall, if central bank stimulus is the “magic” fuel for a bull market, the magic fuel should work for any market, right?
Reality proves otherwise. The Fed has stopped easing since 2014, yet the economy, corporate earnings, and stock market continue to trend higher. The ECB has eased nonstop since 2014, yet European equities have lagged U.S. equities. This is because U.S. economic and earnings growth is stronger than that of Europe’s.
Investors argue that Europe is “cheap” in terms of valuations. Europe is cheap because earnings haven’t really grown.

Remember, the fundamentals drive the stock market’s long term direction. The economy drives earnings, which drives the stock market. Central bank stimulus is not the root cause for a bull/bear market. It’s merely a sideshow. It has an impact, but it’s impact is smaller than that of the economy.
*This chart shows how European valuations have been consistently cheaper than that of the U.S.

1 am: Extremely strong earnings growth is a medium-long term bullish factor for stocks.
Before this earnings season began, the permabears were concerned that “earnings expectations are too high. The risk is to the downside – companies might miss expectations”.
I said on Twitter that this is unlikely. Companies know how to manage earnings expectations, and they don’t often miss when they help analysts set high expectations. (Think about the logic – why would you purposely set high expectations if you know there’s a high probability that you’ll miss? You’d only set high expectations if you KNEW that you’d probably beat expectations).
As it turns out, companies are crushing it with earnings so far.

  1. Amazon beat earnings expectations
  2. Facebook beat earnings expectations.
  3. Intel beat earnings expectations.
  4. Pretty much all the FANGs and major tech companies beat earnings.

This extends to other industries as well, such as finance and energy.
Remember, the stock market and economy move in sync over the medium-long term. The economy drives corporate earnings. The exceptionally strong earnings suggests that the bull market in stocks isn’t over.
1 am: Initial Claims just set a new low. Medium-long term bullish for the stock market.
The latest reading for initial claims just set a new low for this economic expansion (came in at 209k).

*Initial Claims lead the economy and stock market. Historically, Initial Claims trended higher before a bear market in stocks started.
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet.
HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

Read Stocks on April 26, 2018: 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.

10 comments add yours

  1. Hi Troy,
    Thanx for sharing.
    Fine example of clear thinking and making sense of all the noise.

  2. hey troy..
    i totally agree – earnings have crushed exp – but most important to me is guidance…. how do u see that so far ?
    thanks indeed for sharing your thoughts…..
    basically i believe that the current price on the us indexes is close to fair value compared to fundamentals…. im bullish – but i really dont see any big rally for the time beeing – more a chop chop in sideways actions – and that drains people mentally…
    after a year like 2017 it would be natural to have som sideways consolidation going for a long time…. just my 50 cent.
    gert – denmark

    • I think this is the high point of the year in terms of earnings. Which is normal, considering things tend to start off on a high mark and slowly go down over the year.
      But that’s why I think guidance isn’t particularly important. Guidance always starts off very high, and slowly goes down over the year. But the stock market doesn’t peak in Q1 and go down slowly over the year.
      You could be right about the market’s price action in 2018. We’ll see 🙂

  3. Same problem as commented on an earlier post, I can not locate the 17.5% strategy

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