Stocks on March 26, 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. The stock market can fall a little more in the short term.
  2. New developments: odds of a trade war are decreasing. Not a long term bearish factor for the stock market.
  3. Initial Claims increased last week but are still trending lower. A medium-long term bullish factor for the U.S. stock market.
  4. VIX is in backwardation. A medium-long term bullish sign for the stock market.

Read Study: what happens next when the stock market crashes on Thursday and Friday
1 am. The stock market can fall a little more in the short term.
The stock market is medium-long term bullish. The short term is also becoming increasingly bullish, but that doesn’t mean the market can’t fall a little bit more in the short term.
For example, the Put/Call ratio is used by many traders to pick stock market lows. A ratio of 1 is a BUY signal for stocks. This ratio is not quite there yet right now.

Momentum is low, but it is not extremely low. The market can keep falling for a few more days when RSI is as low as it was on Friday.

The bottom line is, nobody knows if the S&P 500’s exact bottom is in. Risk:reward is becoming bullish, and the medium-long term is bullish. Focus on the medium-long term.
1 am. New developments: odds of a trade war are decreasing.
Treasury Secretary Mnunchin made it clear that the U.S. does not want a trade war. The U.S. is using the threat of tariffs to bring China back to the bargaining table. These talks are progressing in the right direction so far (see Bloomberg). China has no choice: they hold the weaker hand because China is a net exporter while the U.S. is a net importer.
Mnunchin said:

We’re not afraid of a trade war, but that’s not our objective.

Trump initially wanted to reduce the U.S.’ trade deficit with China by $100 billion. Trump always negotiates with a high ball number. The end result will probably be less (perhaps the U.S. and China will agree to reduce the trade deficit by $30-40 billion?)
Other countries that hold weaker hands have folded as well. South Korea is close to striking a trade deal with the U.S. that would limit the amount of South Korean steel exports to the U.S.
1 am: Initial Claims increased last week but are still trending lower. A medium-long term bullish factor for the U.S. stock market.
Initial Claims went up a little last week from the previous weak (+3k to 229k).
However, the general trend for Initial Claims is still DOWN. This is a medium-long term bullish sign for the stock market. Historically, Initial Claims trended higher before a bear market in stocks started.

Initial Claims are extremely low right now. We are watching out for any SUSTAINED increase in this data series. There has been no sustained increase so far.
1 am: VIX is almost completely in backwardation. A medium-long term bullish sign for the stock market.
VIX backwardation = when forward VIX futures are cheaper than current VIX futures. This occurs because the smart money is betting on a decline in volatility and a rise in stock prices over the next few months.
VIX was partially in backwardation as of March 20. Here’s the VIX futures curve on that date.

VIX is now almost completely in backwardation.

It won’t take long before VIX is completely in bakwardation. Just another day or two of selling off in the stock market. Once that happens, VIX is a short term AND a medium term bullish sign for the U.S. stock market.
Read Stocks on March 24-25: 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.

4 comments add yours

  1. All this action this year is making me dizzy. I wonder if all this choppiness won’t end up eroding investors confidence in the long term.

    • Hi Mahn,
      Actually this kind of volatility is normal. When the stock market has a year of low volatility (e.g. 2017), it is usually followed by a year of high volatility (e.g. 2018). High volatility itself isn’t a sign that the bull market is coming to an end.
      Regards,
      Troy

  2. So on Friday I grew a pair, and went in with the remaining 50% of my cash that I had on the sidelines.
    Over the weekend, I was somewhat sad, since I saw your study that Monday could be a bloodbath (i.e lower than Friday).
    Today, seems pretty green (i.e i made 15% already from the investments of Friday).
    Is the bottom already in at this point? or can it break support and fall even lower?

    • Still think a retest is likely, but I don’t really focus on the short term. It’s much harder to predict than the medium-long term. Maybe there are really good short term stock traders out there, but that clearly isn’t me 🙂
      Regards,
      Troy

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