Stocks on March 19, 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. Today’s decline was just a technical pullback led by a previously overbought tech sector. S&P 500 still making higher highs and higher lows.
  2. Potential trade war isn’t as bad as it seems.
  3. FAANG accounts for 26% of the NASDAQ. Not as bearish as it sounds.
  4. YoY change in Industrial Production is still trending higher. Medium-long term bullish for stocks.
  5. Housing Starts are still trending higher. Medium-long term bullish for stocks.

Read Study: do bull market tops need breadth divergences?
4 pm: Today’s decline was just a technical pullback led by a previously overbought tech sector.
The stock market tanked today, and the selloff was led by the technology sector. This isn’t surprising. I said on March 13:

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.

That’s exactly what we’re seeing today. FAANG stocks are leading the stock market’s pullback.

The stock market’s short term outlook is 50-50 right now. No one knows if FAANG will make a bigger pullback (I think the odds are <50%).
That’s why we focus on the medium-long term, which is still bullish.
But here’s an interesting thing to note. Despite the financial media’s fears, the S&P 500 is still making higher highs and higher lows. Something to think about.

3 am: Potential trade war isn’t as bad as it seems.
As expected, Trump’s bark is louder than his bite. Trump’s steel and aluminium tariffs are being shrunk as he negotiates with countries over exemptions. Japan and the EU are asking for exemptions to these tariffs.
The EU is responding to Trump’s small scale tariffs with equally small scale tariffs. The European Commission wants to place tariffs on U.S. goods worth $3.45 billion each year (which is chicken scratch). These potential tariffs include orange juice, make up, motorcycles, motor boats, and stainless sinks.
Small scale tariffs do not equal to a trade war. This is not a medium-long term bearish factor for the U.S. stock market.
3 am: FAANG accounts for 26% of the NASDAQ. Not as bearish as it sounds.
FAANG (Facebook, Amazon, Apple, Netflix, and Google) now account for more than 1/4 of the NASDAQ’s market cap. Bearish investors state that this is why the stock market should crash right now.
Here’s what they don’t tell you. FAANG has accounted for almost 1/4 of the NASDAQ for 2 years already. This is nothing new. This has failed as a medium-long term bearish indicator. Here’s the chart.

Sector rotation is common in the last 1-2 years of a bull market. Previously leading sectors tend to lag and previously lagging sectors tend to lead.
3 am: YoY change in Industrial Production is still trending higher.
Industrial Production expanded 4.4% from a year ago. Industrial Production growth is still trending higher.

This is more of a medium-long term bullish sign than a bearish sign. Sometimes Industrial Production and the equities bull market peak together. But most of the time Industrial Production growth decreases before an equities bear market begins.

3 am: Housing Starts are still trending higher. Medium-long term bullish for stocks.
Housing Starts fell last month from the previous month (1236k vs 1329k). More importantly, Housing Starts are still trending higher.

The economy and stock market move in sync over the long run. Housing is a leading indicator for the U.S. economy. Hence, an improving Housing Starts is a medium-long term bullish sign for the U.S. economy and stock market.
Read Stock market on March 17-18: outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P has made a 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.

5 comments add yours

  1. I have a question regarding your trading models. In each of your strategies (Day trading, medium-long term Model), what is your expected long term annualized return and sharpe ratio?

  2. Can the dip today turn into a larger correction? All this Mueller business has me on my toes.

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