- Federal tax receipts are falling. This is not bearish for the economy or stock market.
- Rising interest rates are bullish for stocks over the medium term.
- How to know if the current pullback is the start of a correction.
Read Study: What happens when the stock market surges in January.
2 pm: Federal tax receipts are falling. This is not bearish for the economy or stock market.
Bears point out that Federal government current tax receipts are falling. In their eyes, this is a sure sign that the U.S. economy is deteriorating and the stock market is in trouble.
In reality, this is not a long term bearish sign for the economy or stock market. This is a useless indicator. Federal government current tax receipts will somtimes decline while the economy is booming. This indicator has too many false alarms.
Trump’s tax cuts will probably blow a hole through the federal budget. The tax cuts are moderately positive for economic growth but will not be positive for federal tax receipts (i.e. the tax cuts will not “pay for themselves”).
3 am: Rising interest rates are bullish for stocks over the medium term.
Rising rates are bullish for stocks as long as there is no stagflation. This is because rising rates signify inflation, which means that economic growth is accelerating.
Historically, a rising 10 year Treasury yield has been bullish for stocks as long as the 10 year yield has remained below 3%. The 10 year yield has not even exceeded 3% yet.
3 am: how to know if the current pullback is the start of a correction.
It’s impossible to be 100% certain that the stock market is in a correction until it has already fallen 6%. However, there are signs that can be used to differentiate pullbacks from corrections.
Every single VIX spike has led to lower highs since the last 6%+ “small correction” in June 2016. Here’s VIX’s weekly bar chart.
If VIX spikes again and goes above $17.2 (i.e. higher high), then the S&P’s current “pullback” is probably a correction and not just a pullback.
Read Stocks on January 31, 2018.
Here’s what I think will happen based on my discretionary outlook.
- The S&P will make a small 6%+ “small correction” in Q1 2018. The current rally is the longest one in history without a 6%+ “small correction”.
- The S&P 500 will close higher at the end of 2018 vs the beginning of 2018.
I do not use my discretionary outlook to trade. I remain 100% long UPRO 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 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.