Stocks on March 9, 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. The high yield spread is still flat. Long term bullish for stocks.
  2. Do not expect a bear market to begin in 2018
  3. Half of U.S. companies are losing money. Not a long term bearish sign.
  4. A medium term bearish sign for the Chinese stock market.

3 am: the high yield spread is still flat. Long term bullish for stocks.
The U.S. High Yield Spread for low grade bonds is still flat despite the recent stock market correction. This implies that a bear market is not about to begin. Historically, the High Yield Spread went up months or years before a bear market and recession began.

3 am: Do not expect a bear market to begin in 2018.
Bank of America Merill Lynch has a good list of 19 indicators that tend to be triggered before a bear market begins. 13 of these 19 indicators have been triggered already (68%).

This implies that a bear market will not begin in 2018. Historically, at least 80% of these indicators were triggered before a bear market began. This also implies that the next bear market is not extremely far away. We are in the final 1-2 years of this bull market.
3 am: Half of U.S. companies are losing money. Not a long term bearish sign.
More and more publicly listed U.S. companies are losing money. This trend is especially acute in the tech industry.

This “problem” sounds bearish on the surface, as if a massive multi-decade bubble is about to burst. It isn’t.

  1. Some of these “losses” were due to one-time charge offs.
  2. Many companies (especially tech companies) report big “losses” according to GAAP accounting rules. These “losses” come from R&D and administration costs.

The “problem” of many U.S. companies being unprofitable started in the 1980s because that’s when startups became prevalent. Tech companies and startups were rare before the 1980s. This chart only looks at the number of U.S. companies that are unprofitable. It doesn’t look at the total profits and total losses. If 8 small companies are losing money while 2 big companies are making money, it seems like “most companies are losing money”, even though the 2 profits are vastly greater than the 8 losses. That’s what’s happening in the tech industry today. The massive profits made by tech giants exceed the losses from tech startups.

  1. Before the 1980s, a company needed to be profitable from the very start. Otherwise banks wouldn’t lend money and investors wouldn’t invest money. Hence most U.S. companies were profitable. However, this also stifled a lot of creativity. That’s why startups were rare pre-1980s.
  2. After the 1980s, many startups just needed a fast growing business (irrespective of profits) to raise venture capital funding. This resulted in some bubbles, but also in some of the most innovative companies in a century (e.g. Google).

3 am: A medium term bearish sign for the Chinese stock market.
China’s economy is important because it impacts other emerging market economies. A nation’s economy and stock market move in sync over the long run.
The China Property Composite Leading Indicator is falling right now. This suggests that Chinese real estate will slow down this year. China’s economy is still heavily reliant on its real estate sector, which makes this a medium term bearish sign for China’s economy. Hence this is also a medium term bearish sign for the Chinese stock market.

Read Stocks on March 8: 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. Hi Troy, regarding the BofA Bear Market Signposts, any idea how to access their up to date triggers? Do you know if they post it publicly?

  2. NASDAQ now higher that the previous top before the correction began. Possible signal that the correction is over?

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