Stocks on March 12, 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. This isn’t the longest bull market in history.
  2. Global economy will deteriorate a little in the next few months. A bearish sign for stocks in summer 2018.
  3. The “smart money” is very bearish on VIX (i.e. bullish for stocks)
  4. Share buybacks are long term bullish for stocks.

3 am. This isn’t the longest bull market in history
Last week the financial media celebrated the 10th anniversary of the March 2009 stock market bottom. Bears were quick to point out that this is the “longest bull market in history”. Their argument is silly.
The mainstream definition of a “bear market” is a 20% decline. This definition itself is silly. Why not 19%? Why not 18%? Why not 21%? Our Medium-Long Term Model doesn’t define 20% declines as “bear markets”.
More importantly, the “this bull market has lasted 10 years” argument is false.
The S&P 500 made a 21.5% correction in 2011 when you use the HIGH and LOW prices. By this criteria, the S&P 500 did make a “bear market” in 2011, which brings the current bull market to 6.5 years. Mainstream media thinks that the S&P didn’t make a bear market in 2011 because it fell 19.3% when using daily CLOSE prices.
As you can see, a meager 0.7% is why mainstream media thinks that this is the longest bull market in history. It isn’t. Why use CLOSE and not HIGH/LOW?

3 am. Global economy will deteriorate a little in the next few months. A bearish sign for stocks in summer 2018.
Leading indicators for foreign economies are slowing down. This suggests that foreign economic data will deteriorate this summer.

Citigroup’s Economic Surprise Index will probably turn negative by this summer. This means that U.S. economic data will probably deteriorate a little this summer as well.

There is a weak-moderate correlation between the stock market and short term fluctuations in the economic data. This suggests that the stock market will face weakness this summer.
3 am: The “smart money” is very bearish on VIX (i.e. bullish for stocks)
Smart money “commercial hedgers” are still very bearish on VIX despite VIX’s massive recent decline.

Whenever commercial hedgers were this bearish on VIX, VIX fell and the stock market went up. This is a medium term bullish sign for stocks.
3 am: Share buybacks are long term bullish for stocks
Bears argue that share buybacks are bearish for stocks because it artificially “inflates” earnings per share. The facts disagree. Historically, stocks with the highest buyback ratios outperform the S&P 500 by a wide margin.

This is not unique to the U.S.. We can see a similar pattern in European equities.

Buybacks will surge throughout 2018 thanks to Trump’s tax cut. This is a medium term bullish factor for stocks.
Read Stock market on March 10-11: 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 1-2 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.

2 comments add yours

  1. What kind of impact do you expect in the summer if the global economy deteriorates? Another correction?

    • Possibly another 6%+ small correction. But not a significant correction.

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