Stocks on February 2, 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. Watch out for Monday
  2. Strong jobs report
  3. Rising interest rates will slow down the stock market’s bull market once the 10 year yield reaches 3.5%.
  4. And just like that, investor sentiment isn’t extreme anymore.

Read State of the U.S. economy in February 2018
3 pm: watch out for Monday
Contrary to what the financial media wants you to believe, mini-stock market crashes are very rare. However, there is a higher than normal chance that the market will tank 3%+ next Monday.
A lot of historical crashes happened when the stock market went down on Thursday, went down faster on Friday, and then cratered on Monday. The crash on Monday was usually the bottom.
Here’s the crash of 2015. The S&P bottomed on Monday.

Here’s the crash of 2011. The S&P bottomed on Monday.

Here’s the crash of 1987. The S&P made a marginal new low on Tuesday.

The market might crash next Monday. Why?

The S&P’s downtrend is accelerating right now. Investors and traders are insanely long U.S. stocks right now. They are extremely low on cash. All it takes is one nonstop selloff to trigger a wave of more stop losses. The selloff becomes self-reinforcing.

It increasingly looks like this is the 6%+ “small correction” that we’ve been waiting for. Remember, most of our recent studies suggest that this “small correction” will be closer to 10% than 6%. That is an excellent buying opportunity. A 6% decline brings the S&P 500 to 2700.
3 pm: strong jobs report
Today’s jobs report was strong and beat expectations. Of particular note is the surge in wage growth. Over the past few days, I’ve been saying that inflation will pick up in 2018 due to rising oil prices and tighter labor markets. Although it’s too early to be certain, my prediction will probably be right. Wage growth just made a new high in this economic expansion.

This is important because rising inflation is medium-long term bullish for stocks as long as there’s no stagflation. U.S. economic growth is solid right now, which makes rising wage growth and inflation a medium-long term bullish factor for the stock market.
3 am: Rising interest rates will slow down the stock market’s bull market when the 10 year yield reaches 3.5%
Historically, rising interest rates started to hurt the U.S. stock market once the 10 year yield reached 5%. However, GDP growth in this economic expansion is a lot lower than growth in previous expansions. Based on the current rate of economic expansion, rising rates will start to hurt the stock market once the 10 year yield reaches 3.5%

But there’s a caveat to this story. If the rate of economic growth accelerates (which I expect it to in the final 2 years of this economic expansion), then the 10 year yield won’t hurt stocks until it reaches 4%-4.5%.
3 am: And just like that, investor sentiment isn’t extreme anymore.
A lot of bearish traders/investors were concerned that AAII Bulls was too high. They saw this excessive optimism as a bearish sign for stocks. I said that sentiment indicators aren’t very useful for trading.
The S&P fell less than 3% this week and sentiment is already starting to fall from excessive optimism. This isn’t a useful indicator for picking market tops.

Read Stocks on February 1, 2018.

Outlook

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

  1. 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”.
  2. 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.

6 comments add yours

    • The only way to be 100% sure is to wait until the S&P has actually fallen 6%. But if I had to guess, yes. This pullback seems different than all the ones before it.

  1. Great stuff! I have some cash in my 401k and may invest a tranche next week. I might enter UPRO!

  2. T H A T S. H O W. T H I S P L A Y S. O U T
    ****** Going to be a lot of hedging of portfolios Monday with new shorts put on … market will slowly grind higher with the back and fill trade… then the spike rally for all the new Monday shorts put on which will eventually have to be covered fueling the spike rally
    -what a game played by the United States government allowing non human hft algos to manipulate the U.S stock market combined with the worlds largest Norwegian institutional pension fund taking profits for a 666 Dow jones industrial average rug pull.

  3. Troy, for all your readers to get clarification on if this is the start of the 6% correction, we now have Data from Friday which correlates to the same percentage drop as June 2016 brexit. Using the data from Friday’s % drop, brexit% drop and any other time periods prior, Is there a correlated blog post to help us in in determing time frames of what the market does in the week following, 2 weeks following and month following after such a % drop.

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