Stocks on February 20, 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. Odds of a pullback > odds of a retest
  2. VIX is going up while the S&P is going up. A short term bearish sign for stocks
  3. Yield curve has been steepening. Medium-long term bullish for stocks
  4. U.S. corporate earnings are very strong. Medium-long term bullish for stocks

4 pm: Odds of a pullback > odds of a retest
I don’t like being contrarian just for the sake of being contrarian. But too many traders are calling for a retest of the S&P’s lows.

With so many traders calling for a retest of the crash’s lows, I think there’s a >50% chance that the S&P merely makes a pullback and doesn’t retest the crash’s lows.
A retest of the S&P’s lows is the standard technical pattern. But keep in mind that the S&P’s correction fell in a straight line. So why can’t the S&P rally to new highs in a straight line without retesting the lows?
3 am: VIX is going up while the S&P is going up. A short term bearish sign for stocks
The S&P has gone up over the past 2 days. Instead of falling, VIX has also gone up! This is short term bearish price action for the U.S. stock market.


VIX can sometimes be used as a leading indicator for the S&P 500. For example, VIX went up through mid-late January 2018 even though stocks went up. VIX’s uptrend preceded the stock market’s correction.
3 am: Yield curve has been steepening.
In a previous study I demonstrated that the yield curve inverts months (if not years) before a bear market in stocks begins.
Investors and traders were concerned about the flattening yield curve in 2017. They were afraid that the yield curve would soon invert, thereby signalling an imminent bear market in stocks.
Well here’s the good news. The yield curve is steepening right now, which buys the current bull market some more time.

I expect the yield curve to keep steepening in the next few weeks.
The 2 year Treasury yield is much more overbought than the 10 year Treasury yield. The 2 year Treasury yield has already made a bearish divergence. I expect the 2 year yield to fall more than the 10 year yield when interest rates pullback in the next few weeks. This will cause the yield curve to steepen even more. Medium-long term bullish for stocks.


3 am: U.S. corporate earnings are very strong. Medium-long term bullish for stocks
Analysts are insanely optimistic about U.S corporate earnings in 2018. Sometimes analysts can get carried away with their optimism, which is why it’s better to look at Earnings-Per-Share (EPS) guidance from companies.
Companies prefer to lower EPS guidance, thereby making it easy for them to beat earnings estimates (essentially lowering the bar). Companies are essentially raising the bar when they issue positive EPS guidance. Companies would only raise the bar on earnings estimates if they are very confident about future earnings growth. This confidence is not built on sand. Companies have a better understanding of their earnings outlook than analysts.
A record number of S&P 500 companies have issued positive EPS guidance for 2018! There are 2 reasons why:

  1. The global economy continues to expand.
  2. Trump’s tax cuts will boost earnings.


Tech, health care, consumer staples, and industrials are leading the surge in positive EPS guidance.

The stock market follows the U.S. economy and corporate earnings in the medium-long term. The strength of U.S. earnings right now is a medium-long term bullish factor for stocks.
Read Stocks on February 16, 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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