Stocks on February 16, 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. Housing starts: the economy is still growing at a healthy rate
  2. Small study: the stock market will surge throughout 2018 and early-2019
  3. This has been a NASDAQ-led bounce. Normal for a rally within a bull market.
  4. The S&P 500 will probably make a pullback here.

4 pm: Housing Starts: the economy is still growing at a healthy rate
There has been a little bit of deterioration in U.S. economic data recently. But the overall trend points to continued and healthy growth in the U.S. economy. Housing Starts and Building Permits were released today. Both economic indicators easily beat expectations and point to continued growth.



Housing is a key leading indicator for the U.S. economy, which makes it a key leading indicator for the U.S. stock market. This is medium-long term bullish for stocks. The bull market isn’t over.
3 am. Small study: the stock market will surge throughout 2018 and 2019
A previous study suggested that the stock market would close much higher by the end of 2018. Here’s another small study that suggests the same thing:

The S&P has gone up by more than 1% in 4 of the past 5 days after making a 2 month low. The S&P has only done this 3 times in the past. The S&P was up by more than 20% 1 year later in each of these historical cases.

This study makes sense. Going up 1% each day in 4 of the past 5 days suggests that there is an extremely strong “buy the dip” mentality. An extremely strong “buy the dip” mentality takes time to die. That’s why bull markets end don’t end when momentum is extremely strong. Bull markets end when momentum has weakened for months.
3 am: this has been a NASDAQ-led bounce. Normal for a rally within a bull market.
The stock market’s bounce over the past few days has been led by the NASDAQ. The NASDAQ Composite has already retraced more than 61.8% while the S&P has retraced less than 61.8%

Some experienced traders see the NASDAQ-led bounce as a bearish sign:

  1. The NASDAQ led the stock market’s previous rally.
  2. These traders think that this correction needs to “reset” this mentality and washout the NASDAQ’s optimistic sentiment.

I disagree. The only way to fully washout the NASDAQ’s optimistic sentiment is for the stock market to enter into a bear market. The Medium-Long Term Model predicts that this bull market still has 1-2 years.
I expect the NASDAQ to continue to outperform the S&P. Aside from energy stocks, NASDAQ tech stocks are leading the earnings surge. Hence it’s only natural for tech stocks to continue to outperform the S&P 500.
3 am: the S&P 500 will probably make a pullback soon.
The S&P 500 has almost retraced 61.8% of its entire correction. This is also the S&P’s 50 daily moving average. These are short term resistance levels.

Historically, the S&P often made a pullback after it bounced & retraced 50-61.8% of the previous correction. Here are some examples.



Note that these pullbacks often happen but don’t always happen. There are reasons to believe why there won’t be a pullback this time. The stock market fell in a straight line, so why can’t it rally in a straight line? Price movements are becoming more and more one-way.
The short term is notoriously hard to predict, which is why the Medium-Long Term Model only tries to predict significant corrections and bear markets.
The medium and long term are decisively bullish. A lot of smart traders are bearish on the stock market right now, but here are some examples where the stock market didn’t make a pullback before making a new all-time high.


Yesterday’s study suggested that the S&P will not retest its previous lows even if the S&P does make a pullback.
Read Stocks on February 15, 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.

2 comments add yours

  1. Troy,
    Come August, this should be the longest bull market ever recorded, right?
    Any studies on how long after August, did it take for the previous record to be toppled, and if the signs are similar, etc.
    Thanks!

    • Yes, this will be the longest bull market between recession ever.
      HOWEVER, this is also an extremely slow economic expansion. The slower the economic growth, the longer expansions tend to take (in terms of time). I guess this is when “slow and steady wins the race” becomes true.

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