Stocks on April 4, 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. NAFTA renegotiation is on the right track. Not a medium-long term bearish factor for the stock market.
  2. Difference between today and 1987
  3. Crazy conspiracy theory: what if the stock market’s selloff was being coordinated?
  4. I don’t expect Trump to escalate China’s tariffs into a trade war. Not a medium-long term bearish factor for the stock market.
  5. ISM Manufacturing Index fell, but is still trending higher. A medium-long term bullish sign for the stock market.

5 pm: NAFTA renegotiation is on the right track. Not a medium-long term bearish factor for the stock market.
Trump’s goal is to successfully renegotiate, and his bark is louder than his bite. The U.S., Canada, and Mexico are making good progress on NAFTA renegotiation talks. The U.S. is softening its stance and wants a quick victory (possibly to make the Republicans look good before the midterm elections). From Investing.com

Mexico, Canada and the United States have made good progress in their bid to rework the NAFTA trade pact but still have work to do, Canadian Foreign Minister Chrystia Freeland said. U.S. Trade Representative Robert Lighthizer is pushing hard for a quick deal in principle to avoid clashing with Mexican presidential elections in July. The three members of NAFTA could soon announce the outlines of a deal that would likely tackle the key issue of autos content while leaving other contentious chapters to be dealt with later, three sources familiar with the matter said on Tuesday.

NAFTA renegotiation is not a medium-long term bearish factor for the stock market.
8 am: Difference between today and 1987.
Bearish investors and traders continue to make comparisons between today and 1987, suggesting that the stock market is about to crash very soon.
There is a huge difference between the economy today vs. 1987.

  1. The U.S. economy is improving today.
  2. The U.S. economy was deteriorating by 1987.
  3. The USD Index CRASHED before 1987. The USD Index is going down at a moderate pace today.

Here’s New Home Sales.

Here’s the USD Index.

8 am: Crazy conspiracy theory: what if the stock market’s selloff was being coordinated?
I generally shun conspiracy theories because 99% of them are just crazy. But here’s something I thought of today. Take this thought with a grain of salt because this isn’t data-driven analysis.
This correction is very standard. Almost too standard. Crash, bounce, retest. But what’s even more striking is the way the S&P is retesting its February 9 lows.

  1. This tariff-related news isn’t even that bad. “Tariffs on $50 billion worth of goods”, not “$50 billion in tariffs”.
  2. The S&P is literally falling on every single piece of tariff-related news.
  3. The most important thing is that none of these tariff-related news were unexpected. People knew that Trump would announce steel and aluminium tariffs. Yet the stock market still tanked on that announcement. People knew that the USTR and Trump would announce tariffs on China a week in advance of the announcement. Yet the stock market still tanked on that announcement. People knew that China would retaliate. Yet the stock market still tanked on that retaliation news.
  4. The stock market isn’t falling when on no-news days, even though people know that further announcements are in the pipeline (because the U.S. and Chinese governments signal their announcements a few days in advance).

It’s almost like these tariff-related news are being used as pure triggers. It’s almost as if someone is trying to send The Donald a message. Who? The selling seems way too coordinated.
I think this might be China. China is known to operate openly in its own financial markets, and I would not be surprised if China was selling U.S. stocks on tariff-related news.
Notice how China’s stock index has been flat after an initial drop. The Chinese government is openly buying Chinese stocks.

Meanwhile the U.S. stock market continues to fall.
We all know that The Donald loves the stock market and economy. China might want to hurt the U.S. stock market, thereby causing the Donald to end his trade dispute with China.
And we are indeed starting to see this. The Donald is softening his tone after seeing his beloved stock market fall.

3 am: I don’t expect Trump to escalate China’s tariffs into a trade war. Not a medium-long term bearish factor for the stock market.
Trump has named his tariffs on $50 billion worth of Chinese exports to the U.S.. China plans to launch $50 billion in counter-tariffs against U.S. exports to China (see CNBC). I expect this to be the climax of the U.S.-China trade row.
There is nothing surprising about China’s counter-tariffs. The Trump administration must have been prepared for the possibility that China would respond with counter-tariffs of similar or equal size. Trump’s goal is not to escalate this into a full blown trade war, and I don’t expect him to increase tariffs on China “in a fit of anger” like some analysts expect.
Now that the U.S. and China have put their cards on the table, both countries are working to negotiate a trade agreement that’s slightly better for the U.S.
To put things in perspective, these tariffs are relatively small. From Bloomberg:

The tariffs may have only a minor economic impact, increasing levies by $12.5 billion on Chinese shipments to the U.S. which came to $506 billion last year, said Shane Oliver, the head of investment strategy at AMP Capital Investors Ltd. in Sydney. That’s an average tariff increase on overall imports from China of just 2.5 percent, he said.

Hardly a “disaster”. China’s counter-tariffs will be equally small. Remember, this is not “$50 billion in tariffs”. This is tariffs on $50 billion worth of goods. That’s a big difference.
1 am: ISM Manufacturing Index fell, but is still trending higher. A medium-long term bullish sign for the stock market.
The latest ISM Manufacturing reading fell a little. But overall the data series is still trending higher.


This is a medium-long term bullish sign for the U.S. stock market and economy. Historically, ISM Manufacturing trends lower before a bear market and recession begins. ISM Manufacturing is trending higher right now.

Read Stocks on April 3, 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.
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.

9 comments add yours

  1. Believe or not, I have also been under the impression that it is some huge conspiracy to send Trump a signal! The only difference is that I thought it came from some powerful anti-tariff lobbying groups in the US tied to hi-fly market players like big hedge funds, etc – a great way to show a sign to the impulsive President and to create a buying opportunity, as the bull market still has some way to go. But maybe you are right, maybe China is behind this. Especially as Canada, Europe and Japan now reflect the US selloffs very mildly (while Nikkei is usually known to overreact to US drops).
    Trump is known for not forgetting any of his pre-election promises, so I thought after his election that Chinese markets would be in big trouble. Still kept some $$ in the Chinese ETF… which proved to be a runner-up performer only after the Indian one in 2017! (I didn’t use leveraged ETFs). And now, when it is still not a fait accompli (negotiations till late May), these sudden drops… Even an amateur like me can say that something is very “childish” in these latest market reactions – so most likely, you are right, it is some well-orchestrated action – and probably only a powerful totalitarian empire is capable of achieving such a level of coordination.

    • My initial thought was anti-Trump groups (eg. Soros hates Trump), but then I thought “that doesn’t make sense”. People who shorted stocks because they dislike Trump learned their lesson in 2017.
      But then I saw that China was openly supporting their own stock market on the tariffs news, and it hit me. China could be doing the same thing. Chinese stocks being ok while U.S. stocks going down on tariff-news sends a loud message to Trump.

      • I like that Trump – conspiracy theory… The only thing what made me think was if Donald is intelligent enough to actually get the message. I think not (but that’s because I dislike that guy).

        • Wow. If these assumptions are true, the world gets scary. If there is a macro-manipulator that can create a correction of any magnitude, at any time, and without any fundamental reasons – that gives him a great temptation to do that again and again, buying back on dips and taking advantage of the nervous ones (we will not be among them I hope!) Africa is already bought out by the Chinese… America next???

          • Sorry Oskar, I think you misunderstood me.
            1 large actor (e.g. China) can impact the market’s short term. They cannot impact the market’s medium-long term. The stock market is just too big.
            China can hit the U.S. stock market in the short term, but they cannot cause a bear market. If China shorts the U.S. stock market like crazy but the economy continues to improve, China will have the short squeeze of its life.
            Manipulation does exist in the short term, but it’s mostly irrelevant for the medium-long term. That’s why I focus on the medium-long term.

  2. I like your conspiracy theory, I buy that. I read in various articles that many analysts cannot explain such sell off. Some say people are over reacted. But it seems this across the board sell off is done by a very huge and powerful fund rather than individual investors. Even the weed stock in Canada got sell off in the morning! Really can’t explain that.

  3. Troy, what do you think about Smart Money indicator – short-term bullish now? In the last 2 days last half-hour was spectacular buying – well, the overall momentum of both days was positive, but… right before the 2nd leg of this correction even on great “up” days the last hour or so used to be quite crappy selloff. What is your opinion?

    • Are you referring to Sentimentrader’s Smart Money indicator? I don’t use that.
      It works until a very strong trend emerges. When a strong trend emerges (e.g. beginning of 2017) it doesn’t matter how bearish the smart money is. The stock market keeps going up.

  4. From ken fisher. “Not sure but don’t think the tariff nonsense is about economics, business, trade deficits or that which its chattered about. Trump is the master of look over here while I do something you don’t see over there. I think this is all about N. Korea. All.”
    “Most all last nights announced tariffs are on products example-planes that can be sold to both countries via 3rd countries…particularly all the commodities. It is all like embargoes…which of, course, never have impact.”
    “The 250k U.S. cars sold to China are mostly European models. So China buys from Europe and we sell to Europe and the dance is refined with basically no tariff at all. As my very good friend, Forrest Gump, always said, “Nonsense is as nonsense does.”
    “We can’t sell China soy. So we sell to 17 other countries via ship who for a brokerage commission a lot lower than a tariff sell to China.”
    “I like how the market acts to these silly tariff announcements. I wonder if Kim Jong Un does.”

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