Stocks on March 10-11, 2018: weekend 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. Correlation: rising interest rates aren’t bearish for stocks right now
  2. I disagree with Jeff Gundlach. All stock markets are going up together in the final 1-2 years of this bull market.
  3. Initial claims went up. Not a medium-long term bearish sign for stocks yet.
  4. Stocks will probably go up next week (statistical perspective).
  5. Expect higher wage growth and inflation in the next few months
  6. Friday’s Jobs Report: medium term bullish sign for stocks

March 11. Correlation: rising interest rates aren’t bearish for stocks right now
Investors and traders are afraid that rising interest rates will be bearish for the stock market. We’ve already demonstrated that the long term correlation between rates and stocks is weak at best.
It’s worth noting that while the February correction occurred when interest rates went up and stocks went down, the stocks-rates correlation has now flipped on its head. The correlation went from inverse to positive.

This is why rising interest rates are not consistently bearish for stocks. The correlation constantly flips from inverse to positive to inverse to positive. You cannot use rising interest rates to predict stock prices. Investors and traders should not be concerned about rising interest rates right now.

March 11. I disagree with Jeff Gundlach. All stock markets are going up together in the final 1-2 years of this bull market.
Bond fund manager Jeff Gundlach is long term bearish on U.S. stocks and bullish on emerging market stocks. This is because “the U.S. stock market is overvalued while emerging markets are undervalued”.
I disagree. Historically, it is not possible for the U.S. stock market to crash without an emerging markets crash as well. Let’s assume that Jeff Gundlach is right about emerging markets. An emerging market bull market means that the U.S. stock market’s bull market isn’t over yet.
The S&P 500 and EEM (emerging markets ETF) made bear markets together.

Even the S&P’s and EEM’s significant corrections match up.

March 11. Initial claims went up. Not a medium-long term bearish sign for stocks yet.
Initial Claims on Thursday increased from the previous week’s reading (+21k to 231k). Initial Claims are extremely low right now (historically).

We are looking for a SUSTAINED increase in Initial Claims to help pick the bull market’s top. This hasn’t happened yet. Historically, Initial Claims trended upwards for months/years before a bear market or recession began. Initial Claims are still trending lower right now. This is a medium-long term bullish sign for stocks.
Likewise, we are looking for significant and continuous signs of deterioration in other economic data series. The economic data isn’t as strong right now as it was in December and January. The data is a little bit more mixed right now, but is still generally trending higher.
March 10: Stocks will probably go up next week (statistical perspective)
The NASDAQ surged on Friday’s Jobs Report. This is a short term bullish sign for the NASDAQ (and S&P 500, because the 2 indexes tend to move in the same direction). Here’s the historical data for what happens when the NASDAQ jumps more than 1% on a Jobs Report. There has been 16 gains and 1 loss. The stock market’s short term risk:reward is significantly skewed towards the upside.

March 10: Expect higher wage growth and inflation in the next few months
Friday’s lower than expect wage growth is a mere blip in the overall trend of rising wages and inflation. Various employment-related improvements in 2017 signal that wage growth (and inflation) will increase throughout 2018. Rising inflation is medium-long term bullish for stocks UNTIL we get stagflation. There are no signs of stagflation right now. The U.S. economy is still growing.
The U.S. unemployment rate tends to lead wage growth by approximately 1 year. The unemployment rate defied most expectations and fell in 2017. This implies that wage growth will accelerate in 2018. There has been a large gap between unemployment and wage growth throughout this economic expansion. However, the 2 indicators still generally trend in the same direction (when you invert the unemployment rate).
The following chart shows the inverted unemployment rate moved forward by 1 year.

The NFIB Small Business hiring plans tends to lead wage growth by 15 months. Hiring plans are trending higher, which suggest that wage growth will trend higher throughout 2018.

The U.S. output gap also leads wage inflation by about 15 months. It is also trending higher.

March 10: Friday’s Jobs Report: medium term bullish sign for stocks
Friday’s Jobs Report saw a surge in employment for February.

This is a medium-long term bullish sign for stocks. It implies that a bear market is not imminent. Historically, Nonfarm Payrolls trended downwards before a bear market or recession began.

Read Stock market on March 9: outlook

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.

1 comment add yours

  1. I’m slightly skeptical for 2 reasons for next week
    1). Friday’s volume looked very much like a short covering rally on negative sentiment from the tariffs. This is shown on an hourly chart on ES. Higher highs on price with a downwards sloping (lower highs) on volume.
    2). We have put in a double top from the peak of the previous selloff high of 2787
    *. But yes, u could be right by the 5th day (end of week). Where price could be higher after a small 20-30 handle 38.2% Fibonacci retracement in the first few days or overnight sessions at the beginning of the week.

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