Stock market on February 22, 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. First-time home buyers will push Housing Starts higher. Medium-long term bullish for economy & stock market.
  2. Initial Jobless Claims: the bear market & recession are at least 6 months away
  3. The stock market is very overvalued. Doesn’t mean a bear market will start today.
  4. U.S. household debt isn’t “soaring”. This is not a repeat of 2007

3 pm. First-time home buyers will push Housing Starts higher. Medium-long term bullish for economy & stock market.
First-time home buyers are critical to the Housing Starts data series. Housing Starts increase the most when demand for starter homes (for young families) increase.
I’ve said that Housing Starts will rise due to demographics. Millenials are moving from the 20-29 age group (renters) to 30-39 (buyers). Millenials will buy new houses as they start families, which will push Housing Starts higher. We now have confirmation of that hypothesis. From Bloomberg:
First-time home buyers account for the biggest % of house purchases since the year 2000.

Housing Starts is critical to the U.S. economy. Rising Housing Starts = improving U.S. economy. The real-time economy leads the stock market in the long run. This is medium-long term bullish for the stock market.
3 pm. Initial Jobless Claims: the bear market & recession are at least 6 months away.
Initial Jobless Claims fell today from last week’s reading.

Initial Jobless Claims are trending down overall.

This is still a medium-long term bullish sign for the stock market right now. Initial Claims tend to rise for at least 6 months before a bull market tops.
We are in the final few years of this equities bull market. Hence, we need to watch for any sustained uptick in Initial Jobless Claims. That has not happened yet, but we still need to be vigilant.
3 am: the stock market is very overvalued. Doesn’t mean a bear market will start right now.
Almost all indicators demonstrate that the stock market is overvalued right now. However, valuation cannot be used to time bull and bear market turning points. Stocks can stay undervalued for years and still fall. Stocks can stay overvalued for years and still rise.
This chart has been going around the financial blogosphere. It shows that a very high percentage of fund managers think equities are “overvalued”.

  1. As you can see, fund managers were very afraid of “high valuations” even in 1998, 2 years before the bull market topped. Valuations cannot be used to time bull market tops.
  2. If fund managers are so afraid of overvaluation, why are they still so long stocks? Because the stock market is still yielding far superior returns to bonds.


Here’s the kicker. Everyone’s so afraid that more inflation = higher interest rates. But even if the 10 year yield rises another 1% (from 3% to 4%), the S&P’s yield will STILL be much higher than that of bonds. The S&P’s forward earnings are soaring thanks to Trump’s tax cut and a growing global economy.
3 am: U.S. household debt isn’t “soaring”. This isn’t a repeat of 2007.
Permabears like to cherry pick the data to fit their market outlook. According to permabears, debt is “soaring out of control”.

  1. It’s true that the nominal value of debt is soaring. But this is normal over the long run because A) inflation & B) the economy grows.
  2. We demonstrated in a previous post that household debt as a percentage of the economy has been falling.


Permabears who cherry pick the data are focusing on the increase in non-housing debt. They think that this will be the next “debt bomb” the way mortgages imploded in 2007.

Let’s assume that these permabears are right. Let’s assume that student loans, credit card loans, or auto loans do implode. Here’s why I’m not concerned.
A non-housing debt implosion will have a much smaller impact on the economy and stock market than a housing market debt implosion. Non-housing debt accounts for a much smaller percentage of overall household debt.

So if non-housing debt does implode, I don’t expect the implosion to result in a recession or bear market like 2008.
Read Stocks on February 21, 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. Thank you for your continuous analysis Troy. I read your posts every day – much appreciated!

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