Stocks on March 7, 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’s ongoing tariff threats are a short term bearish factor for the stock market.
  2. Confirmation: Trump’s tax cut is a big medium term bullish factor for the U.S. stock market.
  3. The Citigroup Economic Surprise Index is coming down. A medium term bullish sign for stocks
  4. The global economy is still improving. Medium-long term bullish for stocks around the world.
  5. The stock market will not be hurt by double-digit inflation in the next few years.

3 am: Trump’s ongoing tariff threats are a short term bearish factor for the stock market.
The U.S. is considering broad curbs on Chinese imports according to Bloomberg. The key takeaways are:

  1. The U.S. Trade Representative’s office will recommend various actions to counter China’s theft of U.S. intellectual property. This includes broad curbs on Chinese imports and limits on Chinese investment in the U.S. This announcement is not immediate. It will come out next month.
  2. China has been very quiet amidst Trump’s recent tariff threats. China is more cautious because China stands to lose more than the U.S. from a trade war.
  3. There has yet to be any concrete action despite all the counter-threats from Canada and the EU. In other words, these countries don’t want an across-the-board trade war.
  4. Vice Foreign Minister Zhang Yesui said this week that China will host talks on trade issues with U.S. officials. In other words, China might bow to U.S. threats to avoid a more costly trade war.

There has been a lot of talk but little action. Focus on action. The ongoing tariff talk is a short term bearish factor for the U.S. stock market. But it is not a medium-long term bearish factor. A major trade war requires Congressional approval. Congress supports small-scale tariffs like those on steel but is generally pro-free trade.
3 am. Confirmation: Trump’s tax cut is a big medium term bullish factor for the U.S. stock market.
U.S. companies have announced plans for more than 3/4’s of their tax savings. Almost 40% of these tax savings will result in increased buybacks and dividends. This is a medium-long term bullish factor for the U.S. stock market.

U.S. corporations are “buying the dip” in their own stock prices. Medium-Long Term Model aside, this is partially why I don’t expect the current “small correction” to turn into a “significant correction”. The “buy the dip” mentality is too strong.
3 am: The Citigroup Economic Surprise Index is coming down. A medium term bullish sign for stocks.
The Citigroup Economic Surprise Index aggregates U.S. economic data into a single indicator, demonstrating whether the data is “beating” or “missing” analyst’ expectations right now.
The Economic Surprise Index was very high in December 2017 and January 2018, which is partially why I expected a “small correction” in Q1 2018 (falling Economic Surprise Index = bearish for stocks).
The Economic Surprise Index has been falling. It will probably fall some more in the short term. The more the Economic Surprise Index falls, the more bullish it is for stocks. The stock market’s 6 months forward performance is best when the Economic Surprise Index is between -50 to +50.

3 am: The global economy is still improving. Medium-long term bullish for stocks around the world.
The stock market and real-time economic data move in sync over the long run. This is true not only for the U.S. stock market but also for the majority of foreign stock markets.
Global economic growth is trending higher right now, even though there are a few insignificant signs of foreign economic deterioration in e.g. China. You can see in the following chart that JPMorgan’s Global PMI is trending higher. This is a medium-long term bullish sign for stock markets around the world.

3 am: The stock market will not be hurt by double-digit inflation in the next few years.
I think that this bull market will end with mild stagflation: a deteriorating economy & mid-single digit interest rates. I don’t think the stock market and economy will be hurt by double-digit inflation the way they were in the 1970s.
Demographics play a key long term role in determining inflation. U.S. Births as a % of the Total Population tends to lead inflation by 30 years.

U.S. Birth as as % of the Total Population is going down. This puts secular downwards pressure on inflation. It’s unrealistic to expect inflation to return to 1970s levels (i.e. double digits).
Read Stocks on March 6: 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.

12 comments add yours

  1. Hi Troy,
    You mentioned the economic surprise index is bearish for stocks if it rises; then you mention it is bullish if it rises. I’m confused.

  2. It will be interesting to see what happen tomorrow. There is a sell off in the after market. SPY fell 1.46%. I will buy the dip and trying to guess how low it will drop. Any guesses?

  3. You mention going short ge at 50.55, ge is at 14.50 approx. Was this a different stock or typo on ge’s price? Thanks!

  4. Troy, Did today’s market action paint a big story on your over 50% chance we retest the 200dma.
    1). Today’s 30 handle gap down on the s&p had a perfect opportunity and reason to sell off to the feb lows of 2530 based on the big wig Cohn of Goldman Sachs stepping down on a disagreement over tariffs. The market rallied and filled the gap news. Is this saying something? If the market were to retest, it had a perfect opportunity to do so. This story was a perfect catalyst to be down 1,000 Dow points, the market shook it off like nothing according to the price action.

    • I think it’s a 50-50 bet Matt. All I can say is that the Day Trading Model is net long, and this model has a short term focus

  5. Hi Troy, brilliant work and very informative. Do you update Indian markets as well? Or have any update on indian market?

Leave a Comment