Stocks on March 30, 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. TED spread is widening. Not a medium-long term bearish factor for the stock market.
  2. April is seasonally bullish for the stock market.
  3. Capex Plans continue to surge. A medium-long term bullish sign for the stock market.
  4. The first real medium-long term bearish sign for the stock market.
  5. Initial claims are trending lower. Medium-long term bullish for the stock market.

1 am: TED spread is widening. Not a medium-long term bearish factor for the stock market.
The TED spread has surged since Trump’s tax cut was signed into law. (TED spread = difference between US dollar eurodollar funding and American government treasury bills). The TED spread basically represents the willingness of overseas banks to lend USD to each other. A rising spread is supposed to imply that banks are afraid of future financial conditions.

But if you look at a longer term chart, spreads aren’t even that high. Spreads were much higher when the 2000 and 2007 bear markets began.

Trump’s tax cut has encouraged a lot of U.S. companies to repatriate their cash held overseas. This cash is largely held in U.S. Dollars. They are pulling these dollars out of the Eurodollar market and bringing them back to the U.S.. This causes a sudden decrease in supply for the Eurodollar market, which causes the TED spread to spike. There is no “systematic risk” in the financial system right now.
Hence this isn’t a medium-long term bearish sign for the stock market.
1 am: April is seasonally bullish for the stock market.
The stock market’s seasonality is bullish in April. The S&P has gone up in 9 out of the past 10 Aprils.

April is also the S&P 500’s strongest month of the year.

1 am: Capex Plans continue to surge. A medium-long term bullish sign for the stock market.
Morgan Stanley’s index for Capex Plans (capital expenditures plans) continues to surge. This is a leading indicator for ACTUAL capital expenditures and means that U.S. businesses will increase capital spending over the next few months.

This is a leading indicator for the economy. And since the economy and stock market move in sync over the medium-long term, this is also a leading bullish indicator for the stock market.
1 am: the first real medium-long term bearish sign for the stock market.
I spend most of my time here on Bull Markets disproving “bearish” signs for the stock market. But here is a medium-long term bearish sign that did catch my eye.

Using the S&P 500’s total return index, this has been the longest calendar year winning streak. This implies that the S&P will close LOWER this year than it did in 2017.
I’m not sure if I agree with this, but here are my thoughts:

  1. Most studies suggest that the S&P 500 will close higher in December 2018 vs. December 2017. (See study and study)
  2. A yearly “close lower” doesn’t mean that the stock market will crash in 2018. Even if the S&P closes lower by 1%, it still means that this streak will be broken.
  3. Why can’t this be the 10th year in a row in which the S&P closes higher? Historical streaks of higher closes have gotten longer and longer. From 1900-1920, the stock market went up an average of 3 years and then went down. From 1940-1980, the stock market went up an average of 4 years and then went down. From 1980-present, the stock market went up an average of 8 years and then went down. Cycles are becoming longer and longer.

1 am: Initial Claims are trending lower. A medium-long term bullish factor for the U.S. stock market.
Initial Claims fell last week from the previous weak. Claims are now at 215k. This is the lowest level since this economic expansion began.
This is a medium-long term bullish sign for the stock market. Historically, Initial Claims trended higher before a bear market in stocks started. A new low in Initial Claims implies that the next bear market is at least months away (if not 2 years).

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.
Read Stocks on March 29: 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.

2 comments add yours

  1. What is the impact of this first bearish sign that you see?
    Also, don’t you think the infrastructure bill will give further life to this bull market of ours?
    I passed by the bull in Manhattan today, and thought of you. 🙂

    • I don’t think the infrastructure bill will be approved. And if it is, it will be a very small package. No big spending.
      Regards,
      Troy

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