- The Fed will be supportive of the stock market. Medium-long term bullish factor for stocks.
- VIX and its ETFs: a bullish sign for stocks.
- Nobody knows if the stock market’s exact bottom is in. But this is a good price to buy from a risk:reward perspective.
- The S&P 500 has almost reconnected with its 200 daily moving average.
Read Study: what happens next when the stock market crashes on one day
2 pm: The Federal Reserve is going to be supportive of the stock market. Medium-long term bullish factor.
Some people attribute Monday’s stock market crash to “fears of faster Fed rates hikes due to rising inflation.” This is silly on several fronts.
- We’ve already established that rising interest rates aren’t consistently bearish for stocks.
- Even if inflation were to go up another 1%, it would still be below its long term average. Inflation is not about to spiral out of control any time soon. The Fed will only need to increase the pace of rate hikes if inflation really started to surge. I expect inflation to rise slowly in 2018 and pick up in 2019. Hence, surging inflation is not an immediate concern.
- Here’s the most important point of all. The new Fed chairman has a track record of being dovish. There’s no way he’s going to increase the pace of rate hikes after Monday’s stock market crash. No Fed Chairman wants to cause a bear market on his/her watch. That’s why every Fed chairman since Volcker has implemented the “Greenspan put” i.e. support stocks whenever the stock market falls. The Fed would rather err on the side of being too dovish than on the side of being too hawkish. The Fed would rather hike rates slower than expected than hike rates significantly faster than expected.
And remember, The Donald is watching. We’ve never had a president that cared more about the stock market. If the stock market enters into a “significant correction” or bear market, The Donald will probably call Powell every day and ask “why isn’t the stock market going up today? Activate the Plunge Protection Team!”
New York Fed chief Dudly said today “if the stock market were to go down precipitously and stay down, then that would actually feed into the economic outlook and that would affect my view in terms of what’s the implications for monetary policy”.
In plain English, the Fed would ease and support stocks if the stock market made a significant correction like August 2011.
6 am: VIX and its ETFs: a bullish sign for stocks
VXX is VIX’s non-leveraged ETN. UVXY is VIX’s 2x leveraged ETF. VXX almost always underperforms VIX due to ETN/ETF erosion. That’s why VIX is flat over the long run while VXX loses 99% of its value.
VXX (and UVXY) massively outperformed VIX yesterday when the S&P surged. VIX fell significantly while VXX barely went down.
This is an extremely rare case that only happens at VIX tops (S&P short term bottoms). The last time this happened was August 24, 2015.
VIX topped on August 24. The S&P bottomed on August 24. VXX kept going up for a few more days until September 1.
This is a short-medium term bullish sign for the U.S. stock market.
4 am: Nobody knows if the stock market’s exact bottom is in.
Let’s be honest. It is impossible to know for sure if the stock market’s exact bottom is in. That’s why we can only trade & invest from a medium term risk:reward perspective.
Risk:reward favors bullish investors right now, which is why now is the time to be long stocks. Our crash study comes to 2 conclusions:
- The stock market might make another marginal new low over the next few days. Or it could bounce for a few weeks, followed by a retest or marginal new low. Some short term weakness should not surprise investors/traders.
- Even if our Medium-Long Term Model is wrong and this “small correction” turns into a “significant correction”, this is still a good price to buy at. Any losses will be erased within a few weeks. This is called bullish risk:reward.
4 am: the S&P has almost reconnected with its 200 sma
The S&P’s rally before this “small correction” set all kinds of records. For example, the S&P did not reconnect with its 50, 100, and 200 daily moving averages for an extremely long time. Hence, mean reversion was to be expected.
The current 6%+ “small correction” broke those records. S&P futures has already reconnected with its 200 daily moving average. The S&P 500 was extremely close to reconnecting with its 200 daily moving average on Tuesday. I think the 200 daily moving averages represents MAXIMUM downside risk. That’s equivalent to a 12% “small correction”.
Read Stocks on February 5, 2018.
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- 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.