- Weak Industrial Production
- Short term bearish sign: the S&P is up but so is VIX
- Don’t expect the stock market to make new all-time high so quickly
- Loan growth is falling. Not yet bearish for the economy and stock market.
Read Study: will the stock market make a double bottom?
3 pm: Weak Industrial Production
Yesterday’s Retail Sales report was weak. U.S. economic data continues to deteriorate a little bit. Today’s Industrial Production report was weak: it fell -0.1% from the previous month (+0.2% expected).
But if we step back and look at the trend, Industrial Production is still doing fine. Industrial Production continues to trend higher.
I standby what I said yesterday:
Short term fluctuations in the data are normal and mostly irrelevant to the stock market. I don’t think this is the start of significant economic deterioration because the data is still trending higher. But we are on the lookout for significant economic data deterioration since this bull market in stocks only has 1-2 years left.
3 pm: the S&P is up but so is VIX
The S&P is up 0.6% as of 1:41 pm, but VIX is also up 2.5%! VIX should be down because the S&P is up.
This is a short term bearish sign and supports the short term case that the S&P will make a 50-61.8% retracement of its current bounce.
VIX has been a useful leading indicator during this correction. VIX started to creep higher in January 2018 even though the stock market was going up. In other words, VIX led the S&P’s correction. Now VIX isn’t falling while the S&P is going up. Perhaps VIX is leading the S&P down.
3 am: Don’t expect the stock market to make new all-time highs so quickly
With the S&P 500 closing higher for the 4th day in a row, I don’t think the S&P will quickly make a new all-time high. I expect the S&P to swing sideways in a wide range for a few weeks.
For starters, it usually takes 1-3 months for the S&P to make a new high after it has fallen 10%+.
In addition, VIX soared during the current “small correction”. Historically, VIX surges meant that the S&P spent weeks at the bottom, swinging sideways.
VIX surged in
- August 2015
- August 2011
- May 2010
- September 2008 (we exclude this case because the U.S. economy was clearly in a recession)
- September 2001 (we exclude this case because the U.S. economy was clearly in a recession)
- August 1998
- October 1997
Here were the S&P 500’s bottoms.
3 am: Loan growth is falling. Watch out, but this is not a long term bearish sign yet
Growth in Loans and Leases in Bank Credit fell throughout all of 2017.
This is a demand-side problem and not a supply-side problem. Banks’ lending standards are still very loose. Is this economic indicator long term bearish for the stock market and U.S. economy?
I don’t think so.
- Loan growth has been weak throughout this entire economic expansion because this economic expansion has been slow. 2% GDP growth = the old 4%.
- U.S. companies are sitting on a lot of cash, which reduces their demand for loans. There aren’t enough business investment opportunities, which is why companies are more focused on growing earnings by cutting costs than by increasing revenues (the S&P’s earnings growth continuously outpaces revenue growth).
- Loan growth can fall significantly even during the middle of an economic expansion. See 1984 and 1996.
- Investment from energy companies is down year over year. U.S. oil companies are more focused on improving profit margins per-rig than expanding volume (lower profit margins).
Most importantly, Loan growth is not a timely indicator for predicting bear markets and recessions. Loan growth is often very high just before a bear market or recession begins.
Read Stocks on February 14, 2018.
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- 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.