Stocks on March 29, 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 can’t do much to hurt Amazon and the tech industry. Not a medium-long term bearish factor for the stock market.
  2. A close below the S&P’s 200 day moving average is likely.
  3. Nobody wants a real trade war with Trump and the U.S.. Not a medium-long term bearish factor for the stock market.
  4. The S&P’s Total Put/Call Ratio is at 1.22. Downside risk is limited.

Read Study: high volatility is bullish for the stock market
6 pm: Trump can’t do much to hurt Amazon and the tech industry. Not a medium-long term bearish factor for the stock market.
Trump has  threatened to go after Amazon over “unpaid taxes and hurting retailers”. This isn’t a medium-long term threat to Amazon, the tech industry, or the stock market. There’s a difference between what Trump wants to do and what he can do.
Trump might want to push for probes into antitrust issues (claim that Amazon is a monopoly). He can also encourage states to collect sales tax on third party purchases from Amazon. He can also seek to have the Postal Service charge more to deliver packages.
Reality is far different from Trump’s wishes:

  1. Amazon isn’t a monopoly. Retailers generally aren’t considered monopolies. In addition, it’s up to the Justice Department and FTC to decide whether Amazon is a “monopoly” or not. These cases take years and require a high burden of proof.
  2. Changes to sales tax law requires Congressional approval, and Congress really doesn’t have time for this with the mid-term elections coming up.
  3. Amazon is building its own package delivery service to bypass third-party services.

Trump can do little to stop Amazon’s growth.
1 am: A close below the S&P’s 200 day moving average is likely.
Quantitative studies show that the S&P will probably close below its 200 day moving average before this correction is over. Chartists agree with this.
The S&P is hugging its 200 day moving average right now.

This is called an “oreo pattern” and usually results in a breakdown below the 200sma in 1-2 weeks. It is a short term bearish pattern for the stock market. It isn’t medium-long term bearish.
1 am: Nobody wants a real trade war with Trump and the U.S.. Not a medium-long term factor for the stock market.
Countries don’t put up a trade war fight if they know they’ll lose.

  1. South Korea has quickly folded and signed a revised trade deal with Trump. This deal is better for the U.S. (Investing.com)
  2. China is about to announce a list of retaliatory tariffs. (Investing.com). But the key point to remember is that China and the U.S. are negotiating behind closed doors. China stands to lose much more than the U.S. from a trade war (China is a net exporter).
  3. Germany – the leader of the EU – wants to quickly offer Trump concessions and avoid a trade war. From Investing.com: Germany is in favor of any EU deal covering new rules on tariffs for a series of products including cars, machinery, foodstuffs and pharmaceuticals. Merkel’s government is already sounding out the German car industry on whether it would support a reduction in the 10 percent EU tariff on autos to avoid a trade dispute. Carmakers responded positively to the idea.

The U.S. is still the world’s biggest economic force, and these countries know that they will lose to the U.S. in the event of a trade war. So they’d rather avoid this outcome altogether. Threat of a trade war is not a medium-long term bearish factor for the stock market.
1 am: The S&P’s Total Put/Call Ratio is at 1.22. Downside risk is limited.
The S&P 500’s Total Put/Call Ratio is a contrarian indicator. The S&P’s medium term downside risk is limited when the Put/Call ratio exceeds 1.2.

  1. This is either the market’s correction bottom, or..
  2. The S&P will bounce and make a marginal new low.


The stock market’s medium-long term outlook is bullish and medium term downside risk is limited. Focus on risk:reward.
Read Stocks on March 28: 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.

4 comments add yours

  1. Hi Troy:
    1. I noticed that the volumes on S&P are fairly low these days, merely 60-70% of the 52-wk average – does it surprise you? My understanding is that in the days of so crazy volatility they are expected higher than average, no? Or do you think volatility is CAUSED by these thin volumes (lighter car bounces stronger on bumps)?
    2. Do you think that we’ve got to watch the volumes closely, and feel relieved only if the volumes increase significantly on the UP days (i.e. when big guys come back from sidelines)? Monday was spectacular but gains didn’t hold due to thin volumes, do you agree?
    3. As Art Cashin said, markets during corrections get very technical. With that said, with light volumes, and high amount of algorithmic trading – do you see a significant danger that if some bearish technical indicator is reached, i.e. breaking a 200 sma, then the robots will treat it as a selling sign and can send the market into a downward spiral? I would appreciate if you write a review on that, referring to latest decade (i.e. when the algos were already in place – allusions to 70s-80s wouldn’t fly).
    Thanks!

    • We did a lot of volume analysis in our hedge fund days. Basically volume is neither bullish nor bearish – it just is. Volume always spikes when the market crashes. That’s neither a bullish sign nor a bearish sign.
      Markets TEND to get very technical, but aren’t always. E.g. look at the 1997 crash. There was no retest which is charateristic of most crashes.
      As for the 200sma: outside of a bear market, a break below the 200sma is actually more of a bullish sign than a bearish sign. Same thing for a “death cross”. Every bear market has had a “death cross”. But most “death crosses” didn’t lead to a bear market.

  2. U state the Vix is in backwardation, a generally bullish indicator even more so with the new spot Vix month coming into a new trading month on Monday. Everyone and all financial media channels are talking about the 200dma, since everyone is talking and looking at this, it just might be the climb back rally on the wall of worry further fueling the upside rally, if the general financial media and majority of finance people were not putting this 200dma constantly on the financial media public eye, I would think it would have a greater probability of working. Majority of money flows from sentiment shifts, this might be a great financial sentiment shift of a short covering rally, since everyone is hedging short “looking for the pierce below the 200dma”

    • A break above/below the 200sma is a short term event. VIX backwardation is for the medium term.

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