- The S&P has made a 6%+ “small correction”! Now is the time to buy!
- Now is the time to short $VIX
- Another spike in VIX, and this “pullback” is probably the beginning of a correction.
- You cannot use the bond market to predict the bottom of the stock market’s recent decline.
- The yield curve is steepening. This is long term bullish for stocks
Read Study: what happens when the stock market suddenly reverses.
3 pm: the S&P has made a 6%+ “small correction”!
The S&P has finally made its long awaited 6%+ “small correction”. A 6% decline from the S&P’s all-time high is 2698. The S&P 500 has already fallen below this level.
Our studies suggest that this “small correction” will probably be closer to 10% than 6%.
HOWEVER, medium-long term investors should buy RIGHT NOW because the medium-long term risk:reward profile is very good. Yes, the S&P might fall another 4-6%. But no one can guarantee that the S&P will fall another 4-6%. Once this correction is over, the S&P will rally 20%, 30%, 40%, etc. Don’t let a short term decline in the stock market make you lose sight of the bigger picture. (More on this in a post tomorrow).
On an important sidenote, do not buy right now. Wait for the CLOSE.
3 pm: Now is the time to short VIX
VIX’s RSI should be used as a contrarian indicatr.
VIX’s 9 daily RSI is at 89 right now! Historically, an RSI above 80 either marked VIX’s top or was extremely close to VIX’s top. This is a very good setup for a medium term short-VIX play.
*More on this in a study tomorrow.
4 am: another spike in VIX, and this “pullback” is probably the beginning of a correction.
I said that you can use VIX to know if the stock market’s recent decline is just a pullback or the start of a correction.
Every single VIX spike has led to lower highs since the last 6%+ “small correction” in June 2016. If VIX spikes again and goes above $17.2 (i.e. higher high), then the S&P’s current “pullback” is probably a correction and not just a pullback.
VIX spiked to $17.2 last Friday. If VIX makes a higher high, then this is probably just the start of a 6%+ “small correction”.
3 am: you cannot use the bond market to predict the bottom of the stock market’s decline.
I see these headlines everywhere “the stock market will bottom once the 10 year Treasury yield stops rising”. I disagree.
The stock market didn’t start to fall when interest rates first started to rise. So why should the stock market bottom at the same time as the bond market? Yes, there is an overall inverse correlation between the stock and bond markets (i.e. a positive correlation between stocks and interest rates). But this is a general correlation. It is not a day-to-day correlation, and this correlation changes from time to time.
The stock market’s recent decline was triggered by a rise in interest rates. But that was just an excuse. The real reason was simple – the stock market was insanely overstretched, and mean reversion was overdue. Don’t try to predict the stock market’s bottom by trying to predict the bond market’s bottom.
3 am: The yield curve is steepening. Long term bullish for stocks
The financial media was obsessed with the flattening yield curve a few weeks ago. I said:
- The flattening yield curve is not bearish for stocks until it inverts. It has not inverted yet.
- The yield curve will not flatten nonstop. It will steepen sometimes. This means that the yield curve will not invert in 2018 as many expect.
The yield curve is steepening right now. Long term Treasury rates are rising faster than short term Treasury rates. This means that the next bear market in U.S. equities will not begin in 2018.
Read Stocks on February 2, 2018.
Here’s what I think will happen based on my discretionary outlook.
- 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”. Update: the stock market just made a 8.1% “small correction”.
- 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.