Stocks on January 31, 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. Money is pouring into the stock market. This isn’t a long term bearish factor for stocks.
  2. This could be the 6%+ “small correction” that we’re all waiting for.
  3. U.S. corporate earnings are booming. With or without oil.
  4. The recent rally’s breadth was bullish.

2 pm: Money is pouring into the stock market.
Bearish traders constantly refer to the following chart. It shows that flows into equity funds are poised to set new all-time highs.

Some traders see this as a sign of exuberance. It isn’t. The nominal value of equity fund flows will go up forever over the long term because of inflation! When adjusted for inflation, equity fund flows in January 2018 are almost inline with equity fund flows in January 2013. This is not a long term bearish sign for the stock market.
4 am: this could be the 6%+ “small correction” that we’re all waiting for.
It’s insanely hard to pick tops before “small corrections”. That’s why the Medium-Long Term Model only predicts significant corrections and bear markets.
I previously stated the the stock market would face weakness in February as the U.S. economy deteriorates a little bit in the short term. It is deteriorating a little right now. The Citigroup Economic Surprise Index is falling.

If the correction has already begun, I think a decline to the S&P’s 200 daily moving average is the worst case scenario. That’s a 12% decline, which is as bad as it gets for most “small corrections”.

3 am: U.S. corporate earnings are booming. With or without oil.
Stock market bears argue that “everything is dependent on oil going up. Earnings are going up simply because oil is going up”. This is not true. The boom in U.S. corporate earnings is very broad based.
U.S. corporate earnings are growing with or without oil. For Q4 2017, more than 75% of companies beat earnings estimates while more than 80% of companies beat sales estimates.
5 sectors are reporting double digit earnings growth: energy, materials, finance, technology, and utilities. Finance and technology account for more than 50% of the S&P 500’s market cap! The energy sector (oil) is small compared to finance or tech.
The S&P’s earnings growth is 12%. The tech sector’s earnings growth is 16.1%. The financial sector’s earnings growth is 14.1%.
Hence, a decline in oil prices will not kill the stock market’s earnings growth. The S&P’s earnings growth over the long term will depend on finance and tech.
3 am: the recent rally’s breadth was bullish.
Despite the S&P’s selloff over the past 2 days, the U.S. stock market’s trend is still UP. The selloff is small in comparison to the S&P’s nonstop rally.

The recent rally was broad-based. Breadth was excellent. Here are the S&P’s 10 sector ETFs.
Here’s XLP (Consumer Staples). Going up.

Hre’s XLRE (Real Estate). This is the 1 of 2 sectors that have been falling.

Here’s XLU (Utilities). This is the 2nd sector that’s been going down.

Here’s XLV (Health Care). Going up.

Here’s XLY (Consumer Discretionary). Going up.

Here’s XLK (Tech). Going up.

Here’s XLI (Industrials). Going up.

Here’s XLF (Finance). Going up.

Here’s XLB (Materials). Going up.

Here’s XLE (Energy). Going up.

Read Stocks on January 30, 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.

3 comments add yours

  1. Hello Troy
    Euro/Dollar looks like 4-5th wave since december 2016 low
    It will complete with 5 wave around mid-february and then reverse sharply
    strong Dollar is bad for US stocks
    I think SP 500 will take one more all time high ( 2900 ) toward mid-february
    and then decline 15 percent by the end of march
    kind regards

  2. Market breadth indicators are one of the most important stock market indicators.
    Two Seeking Alpha contributors I follow, Fear & Greed Trader, and Chris Ciovacco, have been pointing out the strong market breadth.
    A commenter at Seeking Alpha, LTTFTrader, has also been saying interesting things about market breadth.
    I developed an indicator–which can be seen as a market breadth indicator–in October 2017. The indicator is a diverse portfolio of twelve solid companies. When at least 10 close up, a buy signal is given. It gave various buy signals for the SPY since October 2017. I have acted on some of them.

    • That’s good 🙂 Market breadth has indeed been bullish. So when I see a headline that says “breadth is weak, the stock market is being dragged up by a few stocks”, I don’t know where they got their data from.

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