Stocks on April 28-29, 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. Interest rates won’t rise as fast as bearish stock market investors think.
  2. Advance-Decline Line’s monthly RSI is very high. Not consistently bearish for the stock market.
  3. Q1 GDP growth was rather strong. A medium-long term bullish sign for the economy and stock market.
  4. Quarterly RSI is very high. Not consistently bearish for the stock market.

Read Study: consumers have finally become bearish on the stock market
Read Study: long term correlation between oil and the stock market
April 29: Interest rates won’t rise as fast as bearish stock market investors think.
Bearish investors particularly like to focus on the rise in interest rates because “this is a paradigm shift vs the past 10 years”. But although I think interest rates will rise, long term rates won’t rise very quickly.
For starters, the dumb money (speculators) are very bullish on interest rates while the smart money (commercial hedgers) are very bearish on interest rates. This chart looks at commercial hedgers positioning for the 10 year Treasury bond. They are very bullish on the 10 year bond, which means that they’re bearish on the 10 year yield.

But more importantly, long term interest rates don’t usually surge when the Fed hikes rates. That’s why the yield curve flattens when the Fed is hiking rates during an economic expansion.
For example, the Fed hiked rates from mid-2004 to mid-2006. The 10 year yield only went up a little.

April 29: Advance-Decline Line’s monthly RSI is very high. Not consistently bearish for the stock market.
One of my readers (sebaz) asked

What about the monthly charts of the AD lines? They have been and remain very overbought for the past few months despite the correction – wouldn’t these portend another drawdown soon to reset the overbought conditions?

*The cumulative Advance-Decline line measures the stock market’s breadth
Yes, it’s true that the monthly Advance-Decline line’s momentum (RSI) is very high right now. It currently stands at 86. But this has not proven to be a consistently medium-long term bearish indicator in the past. See the chart below.

  1. RSI reached this level in May 2013. The stock market did not make a “significant correction” or bear market.
  2. RSI reached this level in January 2004. The stock market didn’t make a big decline.
  3. RSI reached this level in November 1944. The stock market went up over the next 1.5 years.

Bull market tops are marked by bearish breadth divergences.
April 28. Q1 GDP growth was rather strong. A medium-long term bullish sign for the economy and stock market.
Q1 GDP growth (annualized) came in at 2.3%. This was rather strong, considering that Q1 GDP growth is almost always weak (due to seasonality).

This has been true since 2000.

But more importantly, year-over-year GDP growth is trending higher. GDP growth typically trends downwards before a bear market and recession begins. This confirms the other popular economic indicators: the U.S. economy continues to expand, which is a medium-long term bullish factor for the stock market.

April 28: Quarterly RSI is very high. Not consistently bearish for the stock market.
The stock market’s quarterly RSI is very high right now despite the recent stock market correction. Sounds long term bearish? Not necessarily if you zoom out on a long term chart.

  1. This happened in 1954. The stock market soared another >1 year. The next “significant correction” didn’t even bring the S&P back down to where it was when quarterly RSI first became this high.
  2. This happened in 1987 and preceded the famous October 1987 crash.
  3. This happened in 1995. The stock market SOARED over the next few years.

As you can see, the sample size for quarterly RSI is too small. And with the existing data, it’s clear that this isn’t consistent. Sometimes a very high quarterly RSI is medium-long term bullish for the stock market. Sometimes it’s medium-long term bullish for the stock market.
Quarterly data is not particularly useful. The time frame is too long. Stick to daily and weekly data.
Read Stocks on April 27, 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.

6 comments add yours

  1. appreciate your daily direct comments – very clear and to the point.
    i note the quarterly stock charts specifically the RSI is not useful at all.
    what about the monthly charts of the AD lines (Dow/SPX/Nasdaq/NYSE)?
    they have been and remain very overbought for the past few months despite the correction – wouldn’t these portend another drawdown soon to reset the overbought conditions?
    many thanks for your expert opinion

    • That’s a very good point sebaz. I will look into that tomorrow.
      Regards,
      Troy

  2. I like your style and do appreciate your analysis.
    I share your general opinions and trading guidelines on markets too and this comes from more then 30 years in the markets.
    Your membership proposal is an intellectual one and not a mere commercial lure. It is very unusual: pay to understand and not to gain something which is already free. So, while I’m mumbling a bit about, would you mind send me the missing 17,2% system just to known.
    Thanks and regards
    Massimo

    • I think it has commercial value as well. I include other models that are different from the Medium-Long Term Model.
      I sent you an email with the missing 17.2% strategy Massimo. There must be something wrong with my email provider.
      Regards,
      Troy

  3. Hi Troy, would you mind send me the 17,2% strategi to me as well haven’t received it.

Leave a Comment