Stocks on February 18-19: 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. Large cap stocks will continue to outperform small cap stocks.
  2. The S&P is up 6 days in a row. Short term bearish for stocks, irrelevant for te medium term.
  3. Demographic changes will push U.S. housing higher over the next few years. Bullish for the economy and stock market.
  4. Emerging market stocks will outperform U.S. stocks in the final 2 years of this bull market

Read Study: rising inflation is not bearish for stocks
Feb 19: The S&P 500 is up 6 days in a row. Short term bearish, irrelevant for the medium and long term.
The S&P 500 has closed higher 6 days in a row as of last Friday.

This supports the case that the S&P will at least make a small pullback before heading higher.
“6 consecutive days higher” is irrelevant for the medium and long term. This isn’t a rare or medium-long term bearish event. The S&P has “closed higher 6 days in a row” 417 times since 1950.
Feb 19: Large cap stocks will continue to outperform small cap stocks 
I think large cap stocks will continue to outperform small cap stocks over the final 2 years of this bull market.

  1. Large cap stocks are cheaper than small cap stocks. Lower P/E ratios
  2. Large cap stocks are experiencing faster earnings growth.



Large cap stocks are experiencing rapid earnings growth because tech companies (e.g. Google, Amazon, Facebook) are killing it. Bull markets don’t care about valuations. Large cap tech companies will continue to outperform the S&P as long as they continue to demonstrate higher-than-average earnings growth.
Of course these tech companies will fall more than the S&P during the next bear market. Valuations only matter once a bear market has started.
February 18: Demographic changes will benefit U.S. housing over the next few years.
In terms of the U.S. population, adults aged 20-29 tend to rent while adults aged 30-39 tend to buy houses.
The 30-39 age group is booming and will continue to boom over the next few years.

This means that demand for new houses is increasing, which will continue to push Housing Starts higher over the next few years.
Housing is a critical component to the U.S. economy. Housing starts going up = the U.S. economy will continue to improve. Since the U.S. stock market and economy move in sync over the long run, housing starts going up = long term bullish for the stock market.
Feb 18: Emerging market stocks will outperform U.S. stocks in the final 2 years of this bull market
Global inflation is on the rise as this economic expansion ages and the U.S. economy pushes past NAIRU (full employment). Historically, emerging market stocks outperform U.S. stocks during periods of rising inflation because the U.S. dollar goes down.

Historically, rising inflation is long term bearish for the U. S. dollar. A U.S. dollar bear market causes foreign stocks to appreciate purely due to forex fluctuations.

In addition, emerging market equities are still cheaper than U.S. equities despite a massive rally in 2017. This alone will attract U.S. investors to emerging markets. Last year’s massive rally left a strong impression in the minds of investors, so a “buy the dip” mentality is alive and well.

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.

9 comments add yours

  1. Hi Troy,
    I’ve noticed you’ve been quite bullish on the US economy, yet you consistently mention there is 1 to 2 years left, could it be possible that it is more like 4 years is left?
    I read an article that mentioned the bull market might have at least 5 years left. The 1-2 years comment frightens me a little.

    • I think 5 years is stretching it. It depends on the pace of the data. The market can keep going up for 6-9 months after the Model’s bear market signal comes out.
      There are no signs of deterioration right now. 3 years is a possibility, but that possibility is less than 2 years.
      I’m just taking it one step at a time. I don’t really care about how many years there are left in this bull market. I just care about the data and knowing “is the stock market about to enter into a bear market right now”.

      • Thank you for replying.
        I think that’s very reasonable, if your model is programmed like that. Basically, it has a more preemptive nature, which might cause you to miss out on some gains, but you’d likely not get destroyed by a bear market.
        It’s a trade-off, and I agree it’s the right decision. Since the majority of my portfolio is 3X, I understand that type of paranoia.
        Best,
        -Ahmad

  2. Troy,
    I would like your thoughts on providing a blog post concerning the (200dma). This will give readers of your blog more conviction if the rally is still intact based on historical backtesting on how small corrections closed on a daily timeframe below the 200dma and how many days it took to recover back above the 200dma. This is the same study Paul Tudor jones used the Friday before black Monday where price closed below the 200dma. I think this is a very important study for right now. Because we have seen Es bounce off the 200dma on the daily chart on 2 tuesdays ago and then on 2 Friday’s ago. A close below the 200dma will signal to get flat and then get back in once price reclaims the 200dma if we should ever close below it. Thanks for your thoughts on this study.

    • I thought about doing this kind of study, but it doesn’t work. The 200sma is an extremely slow moving average. So it completely depends on the rally before this small correction.

  3. Troy, do you think home builders are still going to do well? Won’t rising rates impact those stocks, not to mention rising labor and lumber costs?

    • I focus more on the broad stock market than individual sectors. But here are my thoughts:
      I think home builders will continue to go up with the rest of the stock market. But I think they’ll underperform the S&P for the reasons that you mentioned. Of course this will depend on the Housing Starts #. If starts boom, they will outperform

  4. Troy, The u.s. Debt ceiling is historic and unprecedented. What is the long term effect of the u.s. Debt ceiling.
    1). Can the u.s. Debt ceiling be increased forever without causing systemic risks and shocks for the stock market?
    2). Are investors ignoring this and becoming complacent about the long term outlook on the U.S debt ceiling? Can we perhaps experience a 1929 crash again because of systemic risks tied to the U.S. Debt ceiling ?

    • We can keep raising the debt ceiling. That’s just a political joke. But the debt is going to be a massive issue one day. Trying to predict how big a problem it will be in 3 years is futile. I’d rather just take it one year at a time. It’s nkt a big deal right now.

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