Stocks on April 30, 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. Data: Peak earnings growth is a medium-long term bullish sign for the stock market.
  2. The stock market in 2018 is very similar to 1996
  3. Margin debt is rising. Not medium-long term bearish for the stock market.
  4. Value stocks will probably outperform growth stocks over the next decade.

4 pm: Data: Peak earnings growth is a medium-long term bullish sign for the stock market.
Many bearish investors are concerned about “peak earnings growth”. Yes, it’s true that earnings growth has probably peaked. The Trump tax cut has the biggest impact on this quarter. But history shows that the stock market tops 6-12 months AFTER earnings growth peaks.
This is in line with the idea that the economy LEADS the stock market.
Look at this excellent chart from Bloomberg. Notice how the 12 month forward returns are always positive AFTER earnings growth peaks.

1 am: the stock market in 2018 is very similar to 1996
Various studies demonstrated that the stock market in 2017 was very similar to the stock market in 1995. The U.S. stock market rallied nonstop with very little volatility in both historical cases.
So far the stock market this year has parallels to the stock market in 1996. For starters, valuations are very similar. (Although valuations are a little higher now than they were in 1996 because interest rates are lower).

The stock market rallied 9% in January 1996, while it rallied 7% in January 2018. So in both cases, the stock market surged in January after a big rally the previous year. Then the stock market made 2 “small corrections” from February – September 1996, before it surged higher towards the end of the year.

2018 might play out in a similar way. Remember, my studies from January 2018 stated that when the stock market soared the way it did in 2017, the stock market eventually goes higher next year but does so in a very choppy manner. And that’s what we’re seeing so far. The stock market has been flat from the beginning of 2018 to present.

So the stock market might swing sideways for a few more months in 2018 before breaking out on the upside. That’s normal. Just because the market isn’t going up doesn’t mean that the market will go down. Many consolidations even last 6-8 months! Here’s the consolidation of 2004.

1 am: Margin debt is rising. Not medium-long term bearish for the stock market.
Although U.S. stock margin debt has fallen a little from its January 2018 highs (-3%), margin debt is still trending higher. The bears claim that this is a medium-long term bearish factor for the stock market because “leverage keeps on increasing”. It isn’t.
Historically, margin debt ALWAYS rises with the stock market. This makes sense. When the nominal value of the stock market rises, investors who are trading on margin will need more and more margin. Rising margin debt is not consistently medium-long term bearish for the stock market.

 
1 am: Value stocks will probably outperform growth stocks over the next decade.
Interest rates are at a long term, multi-decade inflection point. They are so low that over the next several decades, they will probably slowly go higher.

This chart demonstrates that value stocks tend to beat growth stocks over the long run when interest rates are on the rise.

Here’s a logical explanation for this relationship (although I may not be right). Growth stocks rely on low interest rates. They need massive amounts of cheap loans to fuel their high growth rates. And when you take away those low interest rates, growth stocks find it more expensive to acquire the “fuel” to grow at the same speed.
Read Stocks on April 28-29, 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

    • Predicting the exact bottom is impossible. You can only use probability to estimate the exact bottom.

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