Stocks on March 28, 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. Smart Money Flow Index: short term bearish for the stock market, but not medium-long term bearish.
  2. A breakdown below the 200 day moving average IS NOT a medium-long term bearish sign for the stock market.
  3. Is Bitcoin leading the stock market lower? I don’t think so.
  4. The high yield spread is still flat. Medium-long term bullish for stocks.
  5. Trump’s tariffs have very little damage on the U.S. economy. Not medium-long term bearish for the stock market.

5 pm: Smart Money Flow Index: not as bearish as it seems for the stock market.
The Smart Money Flow Index looks at the Dow’s first 30 minutes and last 30 minutes of trading each day. This Index states that the first 30 minutes of trading is “dumb money” and the last 30 minutes of trading is “smart money”. It is supposed to be a leading indicator for the stock market.
The Smart Money Index is making new lows right now even though the S&P 500 hasn’t made new lows.
This suggests that the S&P will break below its 200 daily moving average. Other studies agree.


But is this a long term bearish sign for the stock market? I don’t think so. The Smart Money Flow Index and stock market tends to make an EXTREMELY LONG divergence before a bull market ends. Here’s the extremely long divergence from 2005-2007 that lasted more than 2 years.

This supports the case that the current bull market in stocks will has 1-2 years left.
1 am: A breakdown below the 200 day moving average IS NOT a medium-long term bearish sign for the stock market.
There’s a >50% chance that the S&P 500 will close below its 200 sma (see study). The S&P is sitting right ontop of this support level right now.
Some traders see this as a long term bearish sign. They say that every historical bear market includes a breakdown below the S&P’s 200sma.
That is true.

  1. Every historical bear market did include a breakdown below the S&P 500’s 200sma. HOWEVER…
  2. NOT EVERY BREAKDOWN below the S&P 500’s 200sma was followed by a bear market.

In fact, the 200 day moving average has marked more bottoms than it has marked inflection points in bear markets.

A breakdown below the 200sma is neither a medium-long term bullish sign nor a bearish sign for the stock market. It is irrelevant.
1 am: Is Bitcoin leading the stock market lower? I don’t think so.
Bitcoin and the S&P 500 have had a positive correlation since 2017.

Bitcoin is clearly in a bear market. Bitcoin’s decline has led the S&P 500’s correction.

Now that Bitcoin is in a bear market, does this mean that Bitcoin will drag the S&P 500 down?
I don’t think so. I said in “Be careful when using correlation to trade” that correlations work until they don’t. You have no idea when a correlation will break, especially a correlation has no fundamental underpinnings. There’s no fundamental reason why Bitcoin and the stock market should move together. Bitcoin is driven by speculator sentiment, while the U.S. stock market follows the economy over the medium-long term.
We cannot use Bitcoin’s decline to make a medium-long term bearish case for the stock market.
1 am: The high yield spread is still flat. Long term bullish for stocks.
The U.S. High Yield Spread for low grade bonds is still flat despite the recent stock market correction. This implies that a bear market is not about to begin. Historically, the High Yield Spread went up for months before a bear market and recession began.

We are watching out for a sustained rise in High Yield Spreads right now.
1 am: Trump’s tariffs have very little impact on the U.S. economy. Not medium-long term bearish for the stock market.
At risk of sounding like a broken record, Trump’s tariffs won’t have a meaningful impact on the economy.

  1. China and the U.S. are negotiating to make international trade more favorable to the U.S.. If these talks are successful, Trump will probably dial back on the $50-$60 billion in tariffs.
  2. These $50-$60 billion in tariffs are tiny compared to Trump’s pro-growth fiscal policies for 2018. To put this into perspective…


These tariffs aren’t a medium-long term bearish factor for the stock market. Significant escalation is unlikely.
Read Stocks on March 27: 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. Why I’m medium-long term bullish on the stock market from a discretionary point of view.
  4. 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.

12 comments add yours

  1. Good post, Troy. Always a refreshing read! I had side-stepped recent correction and have come back in at 60% equities on Friday, prior to the big bounce back on Monday. I still have some dry powder to get back fully. Do you think more such correction opportunities will come this year, or this is as good a time as any to get all back in?

    • I think there will be another correction this year after a new all-time high.
      Regards,
      Troy

    • Medium term = the rally between “significant corrections”
      Long term = the bull markets and bear markets
      Regards,
      Troy

  2. Can this Stormy and Trump case cause a bear market Troy? She’s seeking to depose him.

  3. Troy is there usually a new high in the market before the 2nd correction u are predicting happens?

    • Yes Matt. That is the definition of a correction. The stock market has to make a new high for before a new correction can begin.
      Regards,
      Troy

  4. Hi Troy,
    What do you view as the likelihood of this turning into a significant correction?

  5. Do you check the CBOE Total Put/Call Ratio as a contrarian indicator? It closes at 1.34 today, above the 1.25 bearish line.

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