Stocks on April 5, 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. How to know if the S&P 500 will make a marginal new low.
  2. This correction is a buying opportunity because leading economic indicators continue to improve.
  3. The Household Debt Service Ratio is starting to increase. Not a medium-long term bearish factor yet, but we’re watching out.
  4. Trump is pushing for a NAFTA deal as early as next week. The stock market’s downside (in terms of TIME) is limited.

Medium-long term thoughts

1 am: This correction is a buying opportunity because leading economic indicators continue to improve.
How do you know which stock market declines should be bought (i.e. it’s just a correction) and which stock market declines are the start of a bear market?
Simple. Buy corrections that coincide with an improving economy. The Conference Board’s Leading Economic Indicators continue to improve, which means that this is a correction to be bought. This is not the start of a bear market.

1 am: The Household Debt Service Ratio is starting to increase. Not a medium-long term bearish factor yet, but we’re watching out.
It’s not the absolute value of debt that matters. Increasing debt is not a problem AS LONG AS people can service it (i.e. pay back the debt without problems). That’s why we focus on the Household Debt Service Ratio instead. This ratio is starting to go up from extremely low levels.

The debt service ratio tends to surge BEFORE a bear market and recession begins.

We are watching out for sustained and significant increases in the Debt Service Ratio. This will probably occur in 2019 after a few more Fed rate hikes, which supports the case that this equities bull market still has 1-2 years left.

Short term thoughts

3 pm: How to know if the S&P 500 will make a marginal new low.
There is still a possibility that the S&P 500 will make a marginal new low vs its February 9 lows. Remember, the S&P is not out of the woods until it makes a new high vs its March 13 high. This hasn’t happened yet.

Otherwise the S&P is still in a “rolling over to marginal new lows” short term bearish pattern.
See how the S&P “rolled over” in 2011 to make marginal new lows.

Although there is some downside risk in the short term, the medium-long term risk:reward is bullish. Focus on the medium-long term.
1 am: Trump is pushing for a NAFTA deal as early as next week. The stock market’s downside (in terms of TIME) is limited.
According to Investing.com

The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13.

Trump is making compromises in order to reach a deal more quickly (Investing.com).

The Trump administration has softened a key Nafta demand for more North American content in car manufacturing — a potential olive branch on arguably the biggest sticking point as the U.S. pushes to reach a stopgap deal this month.

As you can see, Trump’s tariff threats are mostly hot air. He prefers smaller but easier victories, which at least gives the Republicans something to use in their midterm elections.
I think this tentative deal will be a short term bullish trigger for the stock market when it’s announced next week.
Read Stocks on April 4, 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. Dear Troy.
    Some traders that I respect are foreseeing another drop of the indexes, as SPY to 250 in the next few days, making new lows and then restart a solid move up.
    Do you think it is a likely scenario?

    • Yes, I think marginal new lows is the most likely short term scenario. But then again I don’t trade the short term.

  2. Another wave of tariffs, futures tank, bloodbath tomorrow after three great days…
    So, where are the notorious checks and balances? How can just one person shake the environment so heavily, not being a dictator? (Yet?..) Never imagined that this would be possible in the US.
    In 2003 Putin launched an attack on Russia’s then biggest oil company, Yukos, threw into jail its CEO and principal owner, and started making contradictory statements re: its future, whereby sending the company stock into roller coaster. Putin’s cronies made hundreds of millions on these swings. Eventually the company was declared bankrupt and appropriated by another crony of his.
    I don’t insinuate anything of course…

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