Stocks on April 6, 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. Continued tariff talks support a marginal new low for the U.S. stock market.
  2. This bull market is not exceptionally long.
  3. Interest rates and the stock market are positively correlated. Rising interest rates = medium term bullish for stocks.
  4. Will the NASDAQ lead the stock market lower in the short term?
  5. Very bullish seasonality in the second half of April due to earnings season.

Medium-long term thoughts

1 am: This bull market is not “exceptionally long”.
Every day I hear the words “this is the longest bull market in history”. It isn’t. Not even close.
We define “bear markets” as 40%+ declines (see here for definition). There have been 6 historical bear markets since the 1929 crash.

  1. 1929-1933
  2. 1937-1938
  3. 1968-1970
  4. 1973-1974
  5. 2000-2002
  6. 2007-2009

How long a historical bull market lasted varied greatly. Some bull markets lasted 30 years (e.g. 1938-1968). In comparison the current bull market has lasted 9 years. In fact, there is nothing “unprecedented” about the length of this current bull market.

My point is, our prediction that this bull market has 1-2 years left has nothing to do with “this bull market is the longest bull market in history”. TIME is mostly an irrelevant factor. It is neither bullish nor bearish.
1 am: Interest rates and the stock market are positively correlated. Rising interest rates = medium term bullish for stocks.
There has been a positive correlation between the U.S. stock market and 10 year Treasury yield since March.

This means that the people who think “rising interest rates will hurt the stock market right now” are wrong. Rates and stocks are moving in the same direction. If interest rates go up in the medium term, then stocks will go up as well.
Remember, the correlation between rates and stocks is extremely random. Rising interest rates aren’t consistently bearish for stocks.

Short term thoughts

4 pm: Continued tariff talks support a marginal new low for the U.S. stock market.
Trump has turned up the heat on tariff threats, which is something that I did not expect (I was wrong on this account).
China has yet to respond because this is a long weekend (national holiday this Friday) in China. When China does respond (likely on their Monday morning, our Sunday night), I expect the S&P 500 to make a marginal new low.
Remember, a “crash, bounce, and retest” pattern is very standard for corrections. The “retest” usually involves a marginal new low.

*Note that this is a short term bearish opinion and that I have not altered my medium-long term bullish case. I will explain why in our standard Saturday post.
1 am: Will the NASDAQ lead the stock market lower in the short term?
The major stock indices were above their 200 daily moving averages in 2017. The S&P came close to setting a record for the number of consecutive days above its 200 sma.
One by one the major indices have managed to reconnect with their 200 sma’s (mean reversion).
The S&P has reconnected.

The Russell 2000 has reconnected.

The Dow Jones has reconnected.

The only index that has yet to reconnect with its 200 daily moving average is the NASDAQ. The NASDAQ is very close, and it’s almost as if this 200 sma is a magnet.

I think the NASDAQ will reconnect with its 200 sma just like all the other indices. This reconnect supports the short term bearish case that the S&P 500 will make a marginal new low vs its February 9 low.
1 am: Very bullish seasonality in the second half of April due to earnings season.
I mentioned before that April is the stock market’s strongest month of the year.

If we look closer at this seasonality, it’s actually the second half of April that’s particularly bullish.

There’s a simple and logical reason for this seasonality: earnings season takes place during the second half of April. The stock market goes up more often than it goes down on earnings season.
This suggests that the stock market’s current selloff is limited in terms of time. If the S&P 500 continues to selloff over the next 1-2 weeks, it will reverse upwards during the second half of April.
Read Stocks on April 5, 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.

2 comments add yours

    • It’s a retest, but marginal new low vs Feb 9 lows is still likely.

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