Stock market on February 21, 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. The S&P will probably make a pullback here.
  2. Existing Home Sales tanked today. Not medium-long term bearish for the economy or stock market.
  3. Corporate buybacks are doing their part to prevent this “small correction” from turning into a “significant correction”.
  4. VIX is still in backwardation. Medium term bullish sign.
  5. Consumers are confident about the economy. Medium term bullish for stocks

3 pm: The S&P will probably make a pullback here.
I think there’s a >50% chance that the S&P will make a pullback here. The S&P seems stuck at a confluence of resistances.

  1. 61.8% retracement resistance
  2. 50 daily moving average.


But based on price action, I don’t think the odds of a pullback are extremely high (i.e. 80%). The S&P should have fallen on today’s hawkish FOMC minutes, but it didn’t. That’s a short term bullish sign.
*The short term is notoriously hard to consistently and accurately predict. That’s why I focus on the medium-long term.
3 pm: Existing Home Sales tanked today. Not medium-long term bearish for the economy or stock market.
Existing Home Sales tanked today: down 3.2% from a month ago.

This isn’t a medium-long term bearish sign for the economy or stock market. For starters, Existing Home Sales are still slowly trending higher.

But more importantly, Existing Home Sales don’t matter as much to the economy as New Home Sales. New Home Sales are a better representation of the U.S. housing market. New Home Sales are surging.

The real-time economic data leads the stock market. The U.S. economy is improving, which is medium-long term bullish for the stock market.
4 am: Corporate buybacks are doing their part to prevent this “small correction” from turning into a “significant correction”.
Bloomberg had an excellent article yesterday on the state of corporate buybacks. Here are some key takeaways.

U.S. companies are an important source of sustenance for the bull run in U.S. equities. And that dynamic’s poised to intensify rather than abate.
Canaccord Genuity asset strategist Brian Reynolds, who tracks repurchasing plans among companies in the S&P 500 Index, notes that the firm’s “buyback authorization chart has gone nearly vertical this month.” Such a move suggests that American businesses are more ready than ever to step in and cauterize any market wounds.
During the recent stock market crash, Goldman Sachs’ corporate-trading desk saw a surge in buyback activity as companies raced to repurchase their own stocks.

This is what I’ve said for 2 months. Trump’s tax cut is a massive medium-long term boon to the U.S. stock market. Companies have a lot more cash. With few business opportunities, they are using that cash to buy back their own stocks. To these companies, a stock market crash is the perfect opportunity to buy back their own stock.
The “buy the dip” mentality among various groups of longer term investors will prevent this “small correction” from turning into a “significant correction” like August 2011. It cannot prevent a retest of the crash’s lows, but it will prevent a massive decline from taking place.
3 am: VIX is still in backwardation. Medium term bullish sign.
VIX first fell into backwardation 2 weeks ago. I said:

The VIX futures curve is usually in contango, whereby the spot price is lower than future prices. This is because traders generally expect volatility to increase as time goes on.
The VIX futures curve is currently in backwardation, whereby the spot price is higher than future prices. VIX is rarely in backwardation. Backwardation is historically a bullish sign for the U.S. stock market, even when the stock market has already made a “significant correction”. The last 2 times VIX fell into backwardation almost marked the S&P’s bottom: August 25 2015 and January 15, 2016.

VIX is currently still in backwardation.

It’s insanely hard to consistently and accurately predict the stock market’s short term direction. Nobody knows for certain if the stock market will retest the crash’s low or if it will just make a pullback. But the stock market’s medium & long term are clearly bullish.
3 am: Consumers are confident about the economy. Medium-long term bullish for stocks
The University of Michigan’s Consumer Sentiment continues to trend higher.

This is medium-long term bullish for the stock market because Consumer Sentiment tends to be flat or fall for 1 year before a bear market in stocks begins.
Approximately 70% of U.S. GDP comes from personal consumption. Hence, rising Consumer Sentiment is good for the economy. The economy leads the stock market in the medium-long term.
Read Stocks on February 20, 2018: outlook

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. Hey Troy I really appreciate your content and was wondering what’s your opinion on holding FNGU over UPRO. I mean there is a lot less diversification but the companies in there have decent growth and are giant. The FNGU companies are taking over a lot of markets and will continue to grow at least for the next few years.

  2. Troy,
    What do u think is a good strategy to go long es futures instead of upro, without risking margin calls and force sellouts if the market pulls back so the strategy does not get blown out. 1 lot requires $6500/margin per contract which rewards you with $5,000/profit on 1 lot for a 100 handle move. How much of a fund does one need to trade profitably and protect from margin calls?

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