Stocks on March 17-18, 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. Advance-Decline line is sending a short term bullish signal.
  2. The yield curve’s inversion will take at least half a year.
  3. Q1 GDP will probably be weak. Not bearish for stocks.
  4. Bullish investors should watch out for a sustained rise in the spread for investment grade bonds.
  5. The stock market today is not like the dot-com bubble
  6. Households own a lot of stocks. Not a medium term bearish factor for stocks.

Read Study: strong earnings growth is bullish for stocks
March 18. Advance-Decline Line is sending a short term bullish signal.
Some investors are afraid of deteriorating market breadth. 8 tech companies (Microsoft, Apple, Cisco, Nvidia, Google, Adobe, Netflix, and Amazon) have contributed to more than 50% of the S&P 500’s gains in 2018 so far.
For all the fears of deteriorating market breadth, the Advance-Decline Line is moving higher. This means that market breadth is actually POSITIVE and improving.
*The cumulative Advance-Decline Line adds the number of rising stocks and subtracts the number of falling stocks. It’s a breadth indicator.

The Advance-Decline Line is leading the S&P 500 higher. This is a short-medium term bullish sign for the stock market.
March 18. The yield curve’s inversion will take at least half a year.
The yield curve is flattening again, which has investors afraid of an upcoming recession and equities bear market. I’m not concerned yet.

  1. The difference between the 10 year and 2 year Treasury yield is 0.5% right now. Historically, it takes an average of 2 years for the differential to go from 0.5% to inverted (i.e. 0%). The minimum time is around 6-7 months.
  2. The yield curve’s inversion typically PRECEDES a bear market in stocks by many months.


March 18. Q1 GDP will probably be weak. Not bearish for stocks.
The financial media is abuzz with fears that Q1 GDP growth will be weak (some estimate 1.8%). This is supposed to fit the narrative that the economy is deteriorating into a recession. I disagree.
Q1 GDP is almost always seasonally weak. This is probably due to winter-related weather effects on GDP (economic data tends to miss expectations in February).

The U.S. economy and stock market move in sync over the long run. A lower than expected GDP reading is not a medium-long term bearish sign for the economy and stock market.
 
March 17. Bullish investors should watch out for a sustained rise in the spread for investment grade bonds.
The spread between investment grade bonds (those rated BBB or better) and the U.S. Treasury yield has been widening since February 2018.

This is not yet a problem for the equities bull market, but bullish investors should watch out for a further SUSTAINED widening of spreads. Spreads tend to widen for at least 6 months before a bear market begins. The stock market’s “significant correction” in 2015 was also preceded by a 10 month rise in spreads.

March 17. The stock market today is not like the dot-com bubble
Amazon and Netflix’s recent surge has caused some investors to compare today to the dot-com bubble. These 2 periods are not alike. Tech valuations today are significantly lower than valuations at the top of the dot-com bubble.

A few stocks like Netflix have exorbitant valuations and P/E ratios. But as a whole, the tech sector’s valuation is much lower today than it was at the top of the dot-com bubble.
Tech valuations aren’t reminiscent of the dot-com era yet, but we need to watch this. If the tech sector continues to lead the U.S. stock market’s bull market, then valuations may approach dot-com era levels.
March 17. Households own a lot of stocks. Not a medium term bearish factor for stocks.
Households’ equities as a % of total financial assets is extremely high right now. Some bearish investors see this as the reason for why stocks will enter into a bear market right now. I disagree.

Interest rates are still extremely low despite the Federal Reserve’s rate hikes. This means that investors are forced to “chase yields”. With interest rates still very low, a lot of investors have no choice but to buy stocks. Hence households own a lot more stocks than they used to. E.g. the new “35% might be the old 30%”.

Read Stock market on March 16: 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. 2018 will trend higher but also be a choppy year. There will be another correction later this year.
  3. 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.

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