- Core CPI will rise but not soar. Medium-long term bullish for stocks.
- Valuations are high. Doesn’t mean that a bear market will start in 2018.
- As expected, fears of inflation are overblown.
- Small Business Optimism will fall this summer. Supports the case for another stock market correction in the summer/fall.
Read Why I switched from UPRO to SSO
3 am: Core CPI will rise but not soar. Medium-long term bullish for stocks.
Yesterday’s core CPI number showed that year-over-year inflation is flat. This figure will rise soon. The 3 month annualized core CPI is rising right now. This once again confirms that inflation will rise slowly throughout 2018.
Bears argue that core CPI will surge because “it is breaking out from resistance”.
This argument is silly. Technical analysis (breakout/breakdown) does not apply to economic data. Technical analysis is only meant for market price data. Inflation isn’t going to surge just because it breaks out from a multi-year resistance. Companies don’t increase prices just because they see that CPI is “breaking out”. Consumers and companies aren’t traders.
Rising inflation is more bullish for stocks than bearish.
3 am: Valuations are high. Doesn’t mean that a bear market will start in 2018.
The correlation between high stock market valuations and 1 year forward returns is weakly inverse. This means that you cannot use valuations to time the bull market’s top. So you cannot use valuations to trade unless you hold your positions for years.
3 am: As expected, fears of inflation are overblown.
Yesterday’s economic data shows that U.S. inflation is still stuck at 2.2%. So much for fears that inflation will surge.
Various leading economic indicators suggest that U.S. inflation will rise to 2.5% by the end of 2018. In other words, inflation will rise slowly this year. This is a medium-long term bullish factor for the stock market. Rising inflation is bullish for stocks unless there is stagflation. The U.S. economy is healthy right now, so there are no signs of stagflation.
3 am: Small Business Optimism will fall this summer. Supports the case for another stock market correction in the summer/fall.
The NFIB’s Small Business Optimism continues to trend higher. Small Business Optimism is actually “too high” right now. Optimism will probably come down this summer and fall, which supports the case for a second 6%+ “small correction” sometime this summer or fall.
This isn’t a short-medium term bearish factor for stocks right now. It will be when the Optimism Index starts to trend lower.
Read Stock market on March 13: 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 place entry/exit trades. I am 100% long SSO (2x S&P 500 ETF) 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 long the S&P 500 since September 7, 2017 when it was at 2465.
*I also have a small Day Trading portfolio. Click here to view my day trades.