Stocks on May 1, 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. Chicago PMI has been falling throughout 2018. Something that stock market bulls should watch out for.
  2. Smart money is still bearish on VIX. A medium term bullish sign for the stock market
  3. Threat of a U.S. trade war with the rest of the world (excluding China) continues to die down.

Read Study: the Golden Cross is a good long term bullish signal
1 am: Chicago PMI has been falling throughout 2018. Something that stock market bulls should watch out for.
The Chicago PMI has fallen throughout 2018.

You can see that historically, the Chicago PMI is a leading indicator for the economy and stock market. This indicator tends to turn down before a bear market and recession begins.

But you can also see that historically, the Chicago PMI gives a lot of false signals (i.e. “predicts” recessions and bear markets when there are none).

This means that:

  1. Bullish stock market investors should be on watch if this leading indicator continues to deteriorate.
  2. This indicator is not very TIMELY – it can’t be used to time the top of a bull market.
  3. This indicator has many false signals. That’s why we must look at this together with other economic indicators. The majority of leading indicators continue to improve right now.

1 am: Smart money is still bearish on VIX. A medium term bullish sign for the stock market.
Smart money “commercial hedgers” are still bearish on VIX despite VIX’s decline from its February highs. (Meanwhile dumb money “speculators” are still very bullish on VIX). This is from the latest COT report.
This means that the smart money expects VIX to fall even more in the medium term. And since VIX and the S&P move inversely, this means that the smart money is bullish on the stock market in the medium term.


1 am: Threat of a U.S. trade war with the rest of the world (excluding China) continue to die down.
From Bloomberg:

President Donald Trump will delay imposing steel and aluminum tariffs on the European Union, Mexico and Canada until June 1 as he finalizes deals with them, the White House said in a statement.
The Trump administration has reached agreements-in-principle with Argentina, Australia and Brazil. The U.S. will also extend exemptions for the EU, Canada and Mexico for 30 days to allow for further talks.

This demonstrates that:

  1. Trump is not looking for a trade war when he’s threatening other nations with tariffs. His goal is to negotiate a successful deal.
  2. The nations with less bargaining power are the first to cave. South Korea has already caved. Argentina, Australia, and Brazil are on the verge of caving. Talks are on track with the EU, Canada, and Mexico. If talks had disintegrated, Trump would not have extended steel tariff exemptions. These talks will take longer because these nations have more bargaining power (more trade with the U.S.).

I expect the Chinese tariffs to play out in a similar way. A lot of bark at the beginning, and maybe some tariffs will even be implemented. Then the tariffs will come down and Trump will sign a deal after months of ongoing negotiations. The threat of a real, full-blown trade war is decreasing. This medium-long term threat to the stock market was never big in the first place, but is shrinking even more right now.
Read Stocks on April 30, 2018: 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. So please take my short term thoughts with a grain of salt.
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.

3 comments add yours

  1. really enjoy reading those dayli posts Troy.. so interesting.. beeing in this market for the last 30 years – and still learn every day… thanks man.

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