- Continued tariff threats are a short term bearish factor for the stock market.
- Amazon and Netflix are driving the stock market’s rally. A short term bearish sign for the stock market.
- The increase in Treasury debt will not cause an immediate bear market stocks
- Non-synchronized economic growth will cause increased volatility but no bear market.
Read Study: will stocks make another correction this year?
4 pm. Continued tariff threats are a short term bearish factor for the stock market.
The Office of the U.S. Trade Representative proposed that Trump should impose tariffs on Chinese technology and clothing in retaliation for intellectual property theft. (CNBC)
These ongoing threats will cause continued short term volatility in the stock market. This is not a medium-long term bearish factor for stocks because Trump’s hands are tied. As shown through his steel and aluminum tariffs, Trump cannot single-handedly start an all-out trade war with any major trading partner because Congress is generally pro-free trade. (Trump ended up carving out exemptions in those tariffs.)
Remember how the steel and aluminum tariffs played out?
- Trump announces across-the-board steel and aluminum tariffs. The stock market tanks.
- Congress (particularly Republicans) vocally oppose Trump’s tariffs. The stock market rises.
- Trump partially backtracks on those tariffs. The stock market rises again.
China has been very quiet thusfar with regards to Trump’s tariffs. No signs of escalation yet.
Investing.com reports that these tariffs worth $30 billion a year will roll out next week. Trump asked China to reduce its trade imbalance with the U.S.. This is a bargaining tool for Trump. Remember, China has more to lose than the U.S. in an all-out trade war.
*Update: Trump is seeking $60 billion of tariffs on China each year.
3 am: Amazon and Netflix are driving the stock market’s rally. A short term bearish sign for the stock market.
Netflix and Amazon have soared since the U.S. stock market bottomed in February. They are leading the stock market’s rally.
Netflix and Amazon’s weekly RSI (momentum indicators) are extremely overbought right now.
- Netflix’s weekly RSI was this high in July 2015 and January 2018. Both of these cases resulted in a stock market correction.
- Amazon’s weekly RSI was this high in July 2015, November 2015, May 2017, and January 2018. All 4 of these cases at least saw some short term S&P 500 weakness.
Do not expect the S&P 500 to rally nonstop to new all time highs. A pullback in Netflix and Amazon will = a pullback in the S&P 500. The S&P’s rally will be choppy.
3 am: the increase in Treasury debt will not cause an immediate bear market in stocks
U.S. federal debt is once again increasing. The government needs to issue more and more bonds to make up for 1) Trump’s tax cuts and 2) the fiscal stimulus hidden in this year’s federal budget.
The bears fear that this increase in public debt issuance will cause interest rates to surge and stocks to fall.
Instead of guessing which “potential risk” will turn into a real risk, I would rather just look at what is an actual risk right now. Take things one step at a time instead of using my “crystal ball” (#sarcasm).
Demand for bonds was very strong in the latest Treasury auction. The bid-to-cover ratio for the 10 year Treasury bond was 2.5. The bid-to-cover ratio for the 3 year note was 2.94 (see CNBC).
*The bid-to-cover ratio represents demand for bonds. Any ratio above 2 = strong demand.
- Yield-starve investors have no intention of selling bonds. Demand may waiver a little in the next few months, but it will still be strong.
- Interest rates may rise slowly throughout 2018 but will not surge. Demand is strong enough to soak up most of the increased supply.
- There will be no stock market crash. The increase in bond supply is not a long term bearish factor for the U.S. stock market right now.
We are watching the bond market’s supply and demand closely in case of sustained deterioration. There are only 1-2 years left in this equities bull market, so we’re trying to approximate the bull market’s top.
3 am: Non-synchronized economic growth will cause increased volatility but no bear market.
2017 was remarkable for synchronized economic growth around the world. That’s why every major stock market went up in 2017.
2018 is shaping up to be a different story. Although the major economies around the world are still growing, growth is no longer synchronized. Europe, China, and the U.S. are all showing some cracks.
These cracks are minor and aren’t big enough to cause a significant correction or bear market yet.
Bears see this as a sign that the bull market is over and that a mega-crash is about begin. This isn’t true.
You can see that most cases of non-synchronized economic growth happen within the context of a bull market. Non-synchronized economic growth causes a CHOPPY RALLY in stocks as long as the economy does not crash. There are no signs of major economic deterioration around the world right now.
I expect the U.S. stock market to go up in 2018, but in a much more volatile fashion than in 2017.
Read Stock market on March 12: outlook
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- 2018 will trend higher but also be a choppy year. There will be another correction later this year.
- 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.