Stocks on February 13, 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. Small Business Optimism is trending higher. Bullish for stocks
  2. Earnings estimates continue to soar. Long term bullish for stocks.
  3. Expect interest rates to pullback in the next few weeks/months.

Read Study: “buy the dip” mentality will keep the bull market going
2 pm: Small Business Optimism is trending higher. Bullish for stocks
Today’s Small Business Optimism Index went up. It didn’t make a new high in this economic expansion, but the data series is generally trending higher.

  1. This suggests that the bull market and economic expansion will not end in the next few months.
  2. Historically, Small Business Optimism fell before a bear market and recession began.


Keep in mind that this is about as high as Small Business Optimism gets. It will start to roll over in the next 1-2 years. This fits with the Medium-Long Term Model, which states that the current bull market has 1-2 years left.
3 am: Earnings estimates continue to soar.
U.S. corporate earnings estimates continue to soar despite the stock market’s “small correction”. This is a medium-long term bullish sign for the stock market. It means that the fundamentals of the U.S. economy and Corporate America are strong.

Here’s a long term chart for earnings estimates. Estimates are going parabolic right now. Historically, estimates were not parabolic before a recession or bear market began.

The stock market and economy do not move in a sync on a day-to-day basis. But the the stock market follows the real-time economy in the long run.
The U.S. economy is strong and improving right now, which is why corporate earnings are rising, which is medium-long term bullish for the stock market.
3 am: Expect interest rates to pullback in the next few weeks/months
Some investors and traders attribute the stock market’s correction to rising interest rates. I disagree because rising rates aren’t consistently bearish for stocks. But let’s assume that I’m wrong. Let’s assume that rising rates are indeed bearish for stocks.
We expect rates to pullback over the next few weeks/months.
“Smart money” commercial hedgers are very bullish on the 10 year Treasury bond (bearish on rates).

Short term bond yields (2 year Treasury) were extremely overbought on a weekly bar chart. The 2 year yield is finally starting to come down. It’s only a matter of time before the 10 year yield follows the 2 year yield lower.

There’s a moderately positive correlation between short term fluctuations in economic data and Treasury yields. The Citigroup Economic Surprise Index is falling right now. This will push Treasury yields lower. Based on the common misconception that higher rates = bearish for stocks, this is a medium term bullish factor for stocks.

Read Stocks on February 12, 2018.

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
  2. The S&P 500 has approximately 2 years left in this bull market.

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.

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