Stocks on April 7-8, 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. Smart Money Flow Index supports the case for a marginal new low.
  2. Friday’s Jobs Report: not yet a medium-long term bearish sign for the stock market.
  3. The OIS curve: this bull market in stocks has up to 2 years left.
  4. Initial Claims went up. Not medium-long term bearish yet, but something to watch out for.
  5. U.S. Heavy Truck Sales are still up. Medium-long term bullish for stocks.
  6. VIX suggests that this is just a standard post-crash retest.

April 8: Smart Money Flow Index supports the case for a marginal new low.
The Smart Money Flow Index measures how stocks behave in the last hour of trading vs the first hour of trading (this index assumes that “smart money” trades in the last hour). This Index is making new lows right now while the S&P has yet to make new lows.

The Smart Money Flow Index is a leading indicator for the stock market. The Smart Money Flow Index usually makes a higher low when the S&P has finished making its post-crash retest.
This is clearly not the case today. The Smart Money Flow Index is making a lower low, which suggests that this S&P 500 retest isn’t over. It supports the case for a marginal new low vs the S&P’s February 9 lows.
April 8: Friday’s Jobs Report: not yet a medium-long term bearish sign for the stock market.
This Friday’s Jobs Report was much weaker than expected (+103k private nonfarm payrolls).
Before we jump to any conclusions, let’s remember that the month-to-month fluctuations in economic data tends to be random. It’s the overall TREND that counts. This month’s weak Jobs Reports came after a very strong Jobs Report the previous month.
Nonfarm payrolls tends to trend downwards before a recession and bear market begins.

This is not yet a medium-long term bearish factor for the stock market and economy because this is just one month of data. Nonfarm payrolls is still trending sideways. But if nonfarm payrolls continues to trend downwards over the next few months, then that would be a major medium-long term bearish factor.
April 8: The OIS curve: this bull market in stocks has up to 2 years left.
The OIS curve is sometimes used as a proxy for the Federal Reserve’s policy rate (like the Treasury yield curve). The OIS curve tends to flatten as the economic expansion and bull market ages.
The OIS curve is almost inverted right now. This is a leading indicator for bear markets and recessions, just like the Treasury yield curve.

Does this mean that a bear market and recession are imminent? No. As you can see, historically the OIS curve can invert up to 2-3 years before a bear market begins.

This is not a medium-long term bearish sign for the stock market yet. It can’t be used to time the bull market’s top. It just means that this bull market has at most 2 years left.
April 7: Initial Claims went up. Not medium-long term bearish yet, but something to watch out for.
Initial Claims jumped from the week before.

*Initial Claims lead the economy and stock market. Historically, Initial Claims trended higher before a bear market in stocks started.
This is not a concern at the moment because the data has not started to trend upwards (1 week worth of data does not make a trend). HOWEVER, we are watching out for any SUSTAINED increase in this data series. We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

April 7: U.S. Heavy Truck Sales are still up. Medium-long term bullish for stocks.
Heavy Truck Sales is a leading indicator for the U.S. economy, which makes it a leading indicator for the stock market’s long term direction.
Notice how historically Heavy Truck Sales fell before a recession and bear market began.

Heavy Truck Sales is heading higher today. This is a medium-long term bullish sign for the U.S. stock market.
April 7: VIX suggests that this is just a standard post-crash retest
The S&P is close to retesting its February 9 lows, but VIX is nowhere near retesting its February 9 highs.


This is a sign that the S&P’s downside is limited. This is very typical of crash, bounce, and retest patterns. See 2015


So the keypoint = although there’s a >50% chance that the S&P will revisit its February 9 lows, this will be a MARGINAL new low.
Read Stocks on April 6, 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

  1. Nice blog, unfortunately we now have Trump to deal with and he has a lot of power over the market. Hopefully it ends up like 2015

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