Stocks on March 8, 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. Nobody knows if the stock market’s short term pullback is over. Focus on the medium-long term.
  2. Investor sentiment is still very optimistic
  3. The NASDAQ is much stronger than the S&P 500. Normal for a bull market.
  4. Manufacturing: expect a significant correction or bear market to start in 2019.
  5. Factory Orders: we are in the final 1-2 years of this bull market.

4 pm: Nobody knows if the stock market’s short term pullback is over. Focus on the medium-long term.
Some traders argue that the S&P needs to retest its February 2018 lows. Other argue that the S&P’s pullback is over. Here’s the simple reality: both arguments are equally valid.
The S&P 500 has retraced 50% of its bounce. A 50% retracement is normal. After a correction, the stock market often rallies and then retraces 50%.

On the other hand, a lot of historical corrections do crash, bounce, and then retest the lows.
Hence the short term is unknowable. There is short term downside risk. But the U.S. economy continues to improve and various studies that the S&P 500 will go higher over the next few months. Focus on the medium-long term, which is bullish.
3 am: Investor sentiment is still very optimistic
Last week’s AAII report shows that investor sentiment is still very optimistic despite the stock market’s recent correction. (See the Bull-Bear Spread). This is not a medium term bearish sign for stocks.

The Bull-Bear Spread can remain above 30% for a long time without causing a “significant correction” in the U.S. stock market. For example, the Bull-Bear Spread hovered between 30% to 40% from late-December 2013 to mid-2015, 1.5 years before a “significant correction” began.
3 am: the NASDAQ is much stronger than the S&P 500. Normal for a bull market.

  1. The S&P 500 is still far below its all-time high while the NASDAQ is close to making a new all-time high.
  2. The S&P 500 made a deep pullback while the NASDAQ made a shallow pullback.

Hence, the NASDAQ is much stronger than the S&P 500. Some frothy stocks like Netflix and Amazon are dragging the entire NASDAQ upwards.


NASDAQ’s strenght is not a medium term bearishs sign for the S&P 500. It doesn’t mean that the NASDAQ must fall soon, which will pullback the S&P. NASDAQ’s strenght is normall for a bull market. In a bull market, the sector that leads (e.g. NASDAQ) will continue to lead until the whole bull market is over.
3 am. Manufacturing: expect a significant correction or bear market to start in 2019.
JPMorgan expects Global Manufacturing Growth and PMI to fall throughout 2018.

This implies that ECRI’s Leading Index will fall soon.

ECRI’s Leading Index tends to turn negative a few months before a bear market and recession begins. If ECRI turns negative in the next few months, then we can reasonably expect a significant correction or bear market to begin in 2019. The Medium-Long Term Model agrees.
3 am. Factory Orders: we are in the final 1-2 years of this bull market.
The latest reading of Factory Orders fell. The year-over-year change in Factory Orders fell as well. Overall, the Year-over-Year change in Factory Orders is starting to trend sideways.

This implies that the current bull market still has 1-2 years left. The Year-over-Year change tends to trend sideways or downwards during the final few years of a bull market. We’re watching for any further deterioration in Factory Orders.
Read Stocks on March 7: 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.

4 comments add yours

  1. If NASDAQ leads the bullmarket and has more strength, would you switch from holding UPRO to TQQQ instead?

      • I’ve noticed many ETFs follow the S&P500; my graphs look nearly identical across all my ETFs on days with volatility.

        • Correlation between stock sectors is very strong. They might diverge on a day to day basis. But if the S&P soars, almost all sectors will soar. If the S&P crashes, almost all sectors will crash.

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