Stocks on March 5, 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. As expected, fears of a trade war are overblown.
  2. A short term bearish sign for the U.S. stock market.
  3. Leading Economic Index predicts that we are not on the verge of a bear market or recession.
  4. VIX is spiking. This spike will not exceed the previous spike.
  5. U.S. federal government debt is a lot lower than people think. Not a bearish factor for the stock market right now.

1 pm: As expected, fears of a trade war are overblown.
I said that Trump’s tariffs would not result in a full blown trade war.

  1. Trump’s standard negotiation tactic is to begin with a ridiculous ask and then work his way to a more reasonable position. Starting with a ridiculous bid makes the “middle ground solution” more favorable to Trump.
  2. Congress would block Trump from starting a full-blown trade war if it came to that.

We now have confirmation for these 2 thoughts:

  1. From CNBC: Trump signals that he may drop tariffs if NAFTA is successfully renegotiated. In other words, Trump doesn’t want a trade war. He’s just using these tariffs as a tool for NAFTA renegotiations.
  2. From Business Insider: The Republican party would block Trump if he wanted to start a full-blown trade war. Paul Ryan and other Republicans are already challenging Trump’s steel and aluminum tariffs. Congress has the authority to block Trump’s tariffs.

Trump’s trade war rhetoric might be short term bearish for the stock market, but the medium-long term outlook for stocks is decisively bullish. Focus on the medium-long term.
3 am: A short term bearish sign for the U.S. stock market.
From a pure probability perspective (no discretionary outlook), the odds of a retest vs February’s low is >50%.

There is a short term bearish sign that us medium-long term bullish investors should heed. Other stock markets around the world are retesting their lows.
DAX (German stock index) has made a new low.

STOXX 60 (European stock index) is retesting its February low.

The Nikkei (Japanese stock index) is retesing its low.

Perhaps the S&P 500 will follow these foreign stock indexes and retest its low as well.
3 am: Leading Economic Index predicts that we are not on the verge of a bear market or recession.
The U.S. economy and stock market move in sync over the long run.
There are a few small and insignificant signs of economic data deterioration right now. But as a whole, the U.S. economy is still growing at a healthy rate.
The Leading Economic Index is still trending higher. This is important because the Leading Economic Index tends to turn negative before a recession begins.

This is a medium-long term bullish sign for the U.S. stock market.
3 am: VIX is spiking. This spike will not exceed the previous spike.
VIX is going up again because the stock market is falling.


This is normal. VIX spikes usually come in pairs (i.e VIX spikes, falls, and then spikes again). However, the second top in VIX is usually lower than than the first top in VIX, even if the stock market makes a new low.
VIX topped at 37.5 last time (CLOSE $). This means that even if the stock market continues to fall, VIX should not rise above 37.5. This 37.5 resistance represents MAXIMUM risk for short sellers in VIX.
That’s why the Day Trading Model is short VIX right now.
3 am: U.S. federal government debt is a lot lower than people think.
Every now and then I read arguments stating why the U.S. federal debt will blow up and how that will cause financial armaggedon.
I agree that this will be a long term problem. However, it will not cause a crisis like the EU crisis of 2010 and 2012.

  1. For starters, the Federal debt is a lot lower than most people think. Of the $20 trillion in Federal debt, the U.S. government owes $7.8 billion of that to itself. So the debt is more like $12.2 trillion, which is less than 2/3 of the headline #.
  2. The EU crisis of 2010 and 2012 occurred because the ECB is basically a FOREIGN central bank. The ECB had no obligation to back up the debts of Greece, Italy, Portugal, Spain, etc. In contrast, the Federal Reserve will always back up the U.S. debt via money printing if need be.
  3. Hence, the risk of a U.S. default is very low. The Fed will just inflate its way out of a problem.

This is not a medium term bearish factor for the stock market. This is a slow and steady long term problem that will only rear its ugly head once interest rates are much higher than where they are today.
Read Stocks on March 3-4: weekend outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
  2. The S&P 500 has approximately 2 years left in this bull market.

I do not use my discretionary outlook to trade. I remain 100% long UPRO 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 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.

8 comments add yours

  1. Hi Troy,
    I recently started reading your posts and I’ve been enjoying them, thank you.
    I had a question regarding your UPRO positioning – you mentioned in this post that you were 100% long UPRO since September 7, 2018, however your medium-long term model hasn’t posted a sell signal since February 6, 2016. Did you have to shift to cash in between? If so, what triggered the sell?
    Thanks

    • Hi Frank,
      I used to run a hedge fund. I had a serious back injury last year (took me more than half a year to recover). I shut down the fund to focus on my health.

  2. What are your thoughts on simply using the LEI as a model (ie, 100% long when YoY chg > 0% and 100% cash when it’s not)? It seems near precise in detecting bear markets.

    • Yes, that is very useful. Just comes to show that even simple strategies can work in the long run. You just have to know what to look for.

    • Matt, we didn’t know Trump would threaten tariffs last week. Point is, the short term is hard to guess. Focus on the medium-long term.

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