Stocks on January 30, 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 stock market’s decline is about rising interest rates, but…
  2. If the stock market has begun a correction, then the first bounce will occur when VIX’s RSI hits 80.
  3. Almost all midterm election years have a 6%+ “small correction”.

3 pm: the stock market’s decline is about rising interest rates, but…
Investors and traders attribute the S&P’s decline over the past 2 days to rising interest rates. Once again, this is a nonsensical argument.

  1. Interest rates have been going up since since mid-December. The stock market has soared from December – present.
  2. Bears argue “the 10 year yield breaking above 2.7% triggered the stock market’s decline”. But keep in mind that most investors/traders expected the 10 year yield to break above 2.7% weeks ago. This is not news.
  3. Reading headlines such as “rising interest rates are bearish for stocks” makes me feel old. The exact same headlines appeared on CNN, WSJ, and Bloomberg more than a decade ago during the 2004-2006 rate hike cycle. During the last rate hike cycle, the S&P would sometimes react to rising interest rates. But most of the time the S&P wouldn’t care about rising interest rates. History repeats itself.

The point is, you have no idea when the stock market will start caring about rising interest rates. You also have no idea when the stock market will stop caring about rising interest rates. Hence, stock market traders and investors should ignore interest rates until the yield curve inverts.
6 am: if the stock market has begun a correction, then the first bounce will occur when VIX’s RSI hits 80.
VIX surged more than 20% yesterday even though the S&P fell less than 1%. In a normal 6%+ “small correction”, the S&P’s first meaningful bounce usually occurs after VIX’s daily 14 RSI hits 75-80.
VIX’s daily 14 RSI is currently at 69.

3 am: Almost all midterm election years have a 6%+ “small correction”.
The midterm election year is typically the weakest year of the Presidential Cycle. 2018 is a midterm election year. Historically, the S&P 500 has almost always made a 6%+ “small correction” during midterm election years. There were only 2 exceptions.
Here the biggest intra-year drawdowns during each of the historical midterm election years (using CLOSE $ only).

  1. 1950: -14%
  2. 1954: -4.4%
  3. 1958: -4.4%
  4. 1962: -26.4%
  5. 1966: -22.2%
  6. 1970: -25.9%
  7. 1974: -37.6%
  8. 1978: -13.6%
  9. 1982: -16.6%
  10. 1986: -9.4%
  11. 1990: -19.9%
  12. 1994: -8.9%
  13. 1998: -19.3%
  14. 2002: -33.8%
  15. 2006: -7.7%
  16. 2010: -16%
  17. 2014: -7.4%

Will 2018 be an exception as well, like 1954 and 1958? I don’t think so. The U.S. stock market continues to smash record after record. Thus, a 6%+ “small correction” in 2018 is almost guaranteed.
Read Stocks on January 29, 2018.

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. 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”.
  2. 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.

8 comments add yours

  1. Yellen’s final Fed meeting is upon us. Fed changes have historically led to market drawdowns of 10-15% (peak to trough) on average during the first 6-months with the smallest 3.8% and the largest 36%. Mark minervini wrote this

  2. Troy,
    Can you let us know what was the catalyst that triggered the sell off from 2878.50. Recall last Friday at around 12:30 pm when s&p was at 2855. It surged 20 handles to end the day in the last 4 hours of trade to 2875. Since it was at 12:30 eastern u.s time, was it short covering or new fund flows that made that parabolic 20 handle surge going into last Friday’s close.

  3. Troy, do u think it was a “random” overbought selloff with no specific catalyst to start the selloff?

    • Yes, there was no particular news/reason for the selloff. It wasn’t because of rising interest rates. Rates went up today, but $SPX still went up.

  4. Troy, Do u think this is the start of the 6% correction? Also if we make new highs then sell off does that negate this being the start of a 6% correction.

    • I don’t think so. More like a pullback just before the correction. And yes, if there are new highs then this isn’t the start of the correction.

  5. Troy, it looks like you are shorting vol. again in your day trades. These VIX spikes have been good entries of late. Do you have an RSI strategy to close a VIX short?

    • The Day Trading model doesn’t rely on a single indicator to make trades. Momentum indicators are included.
      Advice: if all you did was trade VIX, you can short VIX once daily 9 RSI reaches 75-80.

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