Stocks on March 22, 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. Trump’s China tariffs are only a short term bearish factor for the stock market.
  2. The S&P is still making higher highs and higher lows. Trendline support is still holding.
  3. Chemical Activity Barometer increased in March. A bullish sign for Industrial Production, the economy, and the stock market.
  4. Deflation is not about to destroy this bull market and economic expansion.

Read Study: a strong economy and weak stock market is bullish for stocks
4 pm. Trump’s China tariffs are only a short term bearish factor for the stock market.
We’ve seen how this story plays out.

  1. Everyone expects Trump to announce tariffs (e.g. every knew that Trump would announce steel and aluminium tariffs – the media was talking about this for a week before it happened).
  2. The stock market still sells off on the day of the tariff announcement. Everyone acts all “surprised” when in reality the tariff was already to be expected.
  3. The stock market goes down for 2 days, and that’s the bottom. The market then recovers those losses over the next few days.

I expect the stock market to play out these tariffs on China in a similar fashion. This is a short term bearish factor for the stock market, but it is not  medium-long term bearish factor. China will probably retaliate with a few small-scale tariffs on U.S. agriculture, but that’s about it.
Don’t you find it weird that China has been relatively quiet? Much quieter than the EU was on Trump’s steel and aluminium tariffs? That’s because China knows that they have much more to lose from a trade war than the U.S.. And China can’t afford to cut off trade with its largest customer.
The odds of a full blown trade war are very low.
Trump always starts with a lot of bark, but his bite is eventually small. For example, the “no exemptions” steel and aluminium tariffs are now riddled with exemptions. The exempted countries include:

  1. Canada
  2. Mexico
  3. Argentina
  4. Brazil
  5. EU
  6. Australia
  7. South Korea

Trump is using these tariffs as a negotiation tactic. He doesn’t want to start a trade war.
3 am: The S&P is still making higher highs and higher lows. Trendline support is still holding.
Despite round after round of short term problems (steel/aluminium tariffs, Mueller investigation, threat of Chinese tariffs), the S&P 500 is still making highs and higher lows after the February 2018 correction. The S&P 500’s support trendline is still holding.

This is a short term bullish sign because the S&P’s short term trend is still UP. Short term traders should only become concerned if the S&P breaks below this trendline.
3 am: Chemical Activity Barometer increased in March. A bullish sign for Industrial Production, the economy, and the stock market.
The 3 month average for the U.S. Chemical Activity increased in March for the 6th consecutive month.

The Chemical Activity Barometer leads Industrial Production, which is a key component of the U.S. economy. This suggests that Industrial Production will continue to grow at a healthy pace for the next few months.
The economy and stock market move in sync over the medium-long term. An improving Chemical Activity Barometer = an improving Industrial Production = an improving economy, which is a medium-long term bullish sign for the stock market.
3 am: Deflation is not about to destroy this bull market and economic expansion.
Here’s the silliest thing I read all day, from Business Insider.

A trade war and competitive currency devaluation was always going to be the end game in our Ice Age thesis as a global deflationary bust destroyed wealth, profits, and jobs. But it looks as if it might be arriving sooner than we had anticipated. A potential trade war brings the global economy closer to a deflationary bust.

There are so many things wrong with this argument.

  1. For starters, there are no signs of deflation right. All signs point to mildly rising inflation.
  2. A full blown trade war is deflationary. However, the odds of a full blown trade war are extremely low right now. All countries (EU, Canada/Mexico, and China) are extremely cautious in their response to U.S. tariffs.
  3. The author (Albert Edwards) has been preaching the deflationary thesis for years. And he has been wrong for years.

I guess fear mongering without any data-driven analysis is good for clicks.
Read Stock market on March 21: 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.

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