Stocks on February 8, 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 500 is making a normal post-crash retest.
  2. VIX is going up less and less. Short-medium term bullish sign for stocks.
  3. The stock market’s analogue to 1986-1987. Medium term bullish, long term bearish for stocks.
  4. Inflation fears are premature. Medium-long term bullish for stocks.
  5. Last Friday’s Jobs Report was strong. This is long-term bullish for the stock market.

3:25 pm. The S&P 500 is making a normal post-crash retest.
Our study suggested that the S&P 500 would face some short term weakness & make a retest after Monday’s crash. The S&P is doing just that right now. Here’s how a standard retest works:

  1. The stock market crashes
  2. Retraces 38.2-50%
  3. Either makes a lower CLOSE or a lower LOW

The S&P is doing just that right now.

A lot of the smartest traders I know didn’t catch the falling knife on Monday. Instead, they bought today on the retest. Tomorrow’s study will explain why the U.S. stock market will probably make a new all-time high in the next few months.
Update: the S&P has made a 10.1% correction as of the CLOSE. Our previous studies suggested that a 10% correction was more probable than a 6% correction. This has been a very standard technical correction thusfar.
2 pm: VIX is going up less and less
As of this writing, the S&P is down 1% while VIX is up 7%. The S&P has almost retested its low on Tuesday while VIX is not even close to retesting its high on Monday.
This is completely normal. VIX usually tops during the first big downleg of a stock market correction. Afterwards, VIX usually makes lower highs even if the S&P makes lower lows. This is a short-medium term bullish sign for the stock market.


7 am: Stock market’s analogue to 1986-1987
I think this is the most likely scenario:

The U.S. stock market in 2018-2019 will be similar to 1986-1987

Here’s the S&P 500 from 1986-1987

The Reagan tax cut of 1986 caused stocks to soar until the 2nd half of 1987. Likewise, I expect the Trump tax cut to be a medium-long term bullish factor for stocks until at least 2019.
I think the U.S. stock market will make more than one 6%+ “small correction” in 2018. Then I agree with Jeremy Grantham, who thinks that the stock market will “melt-up” until some time in 2019. Based on current data, the Medium-Long Term Model predicts that a “significant correction” or bear market will begin in the 2nd half of 2019.
3am: Inflation fears are premature. Medium-long term bullish for stocks.
Some bearish traders/investors attribute the stock market’s recent correction to “rising inflation fears”. I disagree. Rising inflation is not a bearish factor right now.
Historically, rising inflation is BULLISH for stocks because it means that the economy is growing at an increasing pace. The stock market and economy move in sync over the long run. Accelerating growth = long term bullish for stocks.
More importantly, inflation is still low right now. Historically, inflation was higher before economic expansions ended and bear markets began.
Historically, inflation needs to be AT LEAST 3% before a bear market and recession can begin. Inflation is currently at 2%.

I expect inflation to rise slowly in 2018 before surging in 2019.
3 am: Last Friday’s Jobs Report was strong. This is long-term bullish for the stock market.
Last Friday’s Jobs Report beat expectations and wage growth picked up. Overall, it was a solid report. The U.S. economy is healthy, which means that this bull market isn’t over.
Some investors are concerned that this is the longest streak of consecutive payroll gains. They think this means that the U.S. economy will deteriorate soon.

I disagree.

  1. All it takes is a 1 month decline in payrolls to end this historic streak. A 1 month decline in payrolls does not mean that the economic expansion is over.
  2. The BLS has gotten better at accounting for statistical noise in the labor market. Payrolls data used to fluctuate a lot more than it does today.
  3. Jobs growth is a lot weaker today than it was during the 1990s. But even the best years in the 1990s had 1 or 2 months of negative jobs growth.


Focus on the economic data’s trend. All signs point to continued growth for the next year or two. This is a long term bullish factor for the U.S. stock market.
Read Stocks on February 7, 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.

12 comments add yours

  1. Hi Troy,
    What would you rate as the likelihood of this turning into a “significant” correction?

  2. I decided to invest the remainder today. Felt like there was sale.
    Now I suppose if we get a “significant” correction, I’d be in trouble, haha.

    • Well think about it this way. In the event $SPX falls another 5%, UPRO would be down 15%. That’s your risk. What’s your reward? It’s much higher.

      • I suppose, if SPX falls another 15%, would we still be in a Bull market after it?

        • Yes. The stock market will eventually re-align itself with the economy as long as the economy is improving. But I think the odds of another 15% decline in SPX are EXTREMELY LOW.

  3. Can you tell about what software you are using to create all of your studies ? Where do you get all the data?

    • A lot of the data comes from Bloomberg. The studies are mostly just done through Excel.

  4. Past history suggests a retest or lower low in about a month? What is your thought?

    • There already was a retest today. Another retest in a month could happen, but I think the odds are less than 50%. Either way, risk:reward is the most important thing to remember.
      Kind regards,
      Troy

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