Stocks on March 23, 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. Traders are looking for a close below the S&P’s 200 daily moving average.
  2. China doesn’t want a trade war. This isn’t a medium-long term bearish factor for the U.S. economy.
  3. The S&P 500’s maximum short term risk is a retest of its February 2018 low.
  4. Existing Home Sales went up in February. A medium-long term bullish sign for the stock market.
  5. CEO’s are extremely optimistic. A bullish leading indicator for the economy and stock market.

4 pm. Traders are looking for a close below the S&P 500’s 200 daily moving average
The best short term traders I know are looking for a marginal low below the February 9 lows. This also means that the S&P will close below its 200 daily moving average. (The S&P is currently sitting on its 200 daily moving average).

From a pure statistical perspective, I said that a close below the 200 sma is likely (see study from February).
Personally I don’t know if I agree with this short term bearish outlook. I’m not great at short term trading. I think this is a 50-50 shot. Always jump to a higher time frame when the short term is confusing. That’s why I focus on the medium-long term, which is still bullish. Stick to the facts and don’t let the market’s price lead your train of thought. Otherwise you’ll become bearish AFTER the market falls and become bullish AFTER the market rises. Trend followers get killed in a choppy and volatile market.
1 am: China doesn’t want a trade war. This isn’t a medium-long term bearish factor for the U.S. economy.
For starters, Trump did not start a full blown trade war. These are tariffs on $50-$60 billion worth of goods, not a $50-$60 billion tariff.

  1. China and the U.S. will negotiate over the next few weeks. This is just Trump’s way of bringing China to the negotiating table.
  2. China exports $460 billion to the U.S. each year. $60 billion is just 13% of China’s exports to the U.S.

More importantly, China does not want to risk a trade war. China is a net exporter and the U.S. is a net importer. China has much more to lose than the U.S. from a trade war. That’s why China has responded to the U.S. with a tariff on $3 billion worth of U.S. exports (see CNBC).
Let that sink in for a moment. Trump imposes a tariff on China for $60 billion worth of goods, and China considers imposing tariffs on the U.S. for $3 billion worth of goods. It’s pretty obvious which side has the weaker hand.
There’s a simple reason for this. China imports a lot of U.S. agricultural products (food is a necessity). China NEEDS these imports from the U.S.. Their domestic production is not enough to make up for a sudden shortfall, and they can’t quickly switch suppliers from e.g. the U.S. to Canada and Australia. The last thing China wants is skyrocketing food prices. China has long been afraid of surging inflation.
In other words, China needs the U.S. than the U.S. needs China. The U.S. doesn’t need cheap Chinese imports. It can get those from other Asian countries.
This is not a medium-long term bearish factor for the U.S. stock market.
1 am: the S&P 500’s maximum short term risk is a retest of its February low.
The U.S. stock market’s medium-long term outlook is bullish. The strong economy will eventually lead the stock market higher. However, this doesn’t mean that the stock market can’t fall in the short term.
I think the stock market’s maximum downside risk is a retest of its February low. A lot of historical corrections saw a crash, bounce, and retest. Perhaps the S&P is making a retest right now. Who knows. The short term is notoriously difficult to predict. The S&P is currently sitting on its 61.8% retracement.

See the 2016 “significant correction”. The market crashed, bounced, and retested.

See the 2011 “significant correction”. The market crashed, bounced, and retested.

See the 1998 “significant correction”. The market crashed, bounced, and retested.

The bottom line is, the stock market’s short term downside risk is limited and the medium-long term outlook is bullish. Risk:reward favors bulls. A retest is possible, but that’s about it.
1 am: Existing Home Sales went up in February. A medium-long term bullish sign for the stock market.
The latest reading of Existing Home Sales (for February) went up more than economists’ expected. More importantly, Existing Home Sales are still trending higher.

The housing market is a leading indicator for the U.S. economy. Rising Existing Home Sales implies that the economy continues to grow at a healthy rate. The economy and stock market move in sync over the long run. This also implies that the bull market in stocks isn’t over.
1 am: CEO’s are extremely optimistic. A bullish leading indicator for the economy and stock market.
It’s not just small businesses that are extremely optimistic. CEO’s are very optimistic as well. CEO optimism tends to lead capital investment, which is a key contributor to economic growth. Here’s the Business Roundtable’s CEO Outlook.

This implies that capital spending will increase over the next few months, which is a medium term bullish sign for the economy. And since the economy and stock market move in sync over the medium-long term, this is also a bullish sign for the stock market.
Read Stock market on March 22: 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.

10 comments add yours

  1. Hey Troy! Thanks for writing this blog I find this extremely helpful as a beginner investor looking for some tips. Due to the current market correction, do you think it is a good time to buy?

    • Yes Steve. Dips should be bought when the fundamentals are sound the way they are right now. The only time you don’t want to buy the dip is when the fundamentals deteriorate. That is not the case today.

  2. Hey Troy! Thanks for writing this blog as I find it very helpful. I was wondering what you think about the market right now, is it a time to buy due to the recent drop? Moreover, do you think we will still have a correction despite having two already this year.

    • Yes, we are very close to a capitulation low. The honest answer is that nobody knows if the market will have 1 final short term drop, but either way the risk:reward profile is extremely bullish.
      Also Steven, this isn’t “2 corrections”. This is 1 correction. This would only be a 2nd correction had the S&P made a new all-time high, which it didn’t.

  3. What do you think of the Dow Theory? Its sell signal is close to being triggered.

  4. Hi Troy, thank you very much for your site: it is a must-read for scared investors in the days like these, as you emphasize that all this has already happened in the history, and the outcome has always been the same, within reasonable timeframe.
    Some questions.
    1. Do you think that this March dip is more emotional (China, Trump’s whim) than the February one (which was more fundamental due to interest rates)? Do you think that interest rate concerns are in the back burner now? Or you see fundamental reasons for this one as well?
    2. You refer only to historical double-bottomed W-shape corrections (with one retest) – do you have examples of 2-or-more-retesting corrections? My understanding is that retest is at least repeating the previous bottom, so I refer to those.
    3. You wrote that the bear market is expected in 2019, more likely late in the year – do you still think so? (I mean, not earlier?)
    4. When you refer in other chapters to second correction to expect in 2018 – do you mean that it will be indeed 2nd correction, and not a “sub-correction” of the current one, i.e. that the new high will be achieved in the interim?
    5. What sectors do you prefer to buy in its lows now? Tech among them? Or their P/E still seems way too high?
    Thanks!

    • 1. I think the market is just using these tariffs and the fear of interest rates as an excuse for the correction. The real reason: last year’s rally was the longest rally in history.
      2. No, triple bottom corrections are almost nonexistent.
      3. Yes, still in late 2019.
      4. It means a new all time high, then another correction. Not a sub correction.
      5. I don’t really focus on individual sectors.

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