Stocks on May 11, 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. Inflation is trending higher very slowly. No sign of “surging inflation that will kill the stock market and economy”.
  2. Small cap is at previous high resistance. A short term bearish factor for the stock market.
  3. Initial Claims are still trending lower. Medium-long term bullish for the stock market.
  4. Commercial and Industrial Lending is weak. NOT a bearish sign for the economy and stock market.

Read Why inflation is heading higher over the long term, but probably won’t return to 1970s-levels
5 am: Inflation is trending higher very slowly. No sign of “surging inflation that will kill the stock market and economy”.
The latest CPI figure demonstrated that year-over-year inflation is now barely higher than 2.4%. Contrary to what the bears are worried about, there are no signs of “surging inflation that will kill the stock market and raise interest rates”.
In the beginning of 2018 we expected inflation to reach 2.5% for this year. It seems that we are right. We don’t expect inflation to go beyond 3% this year.

Most of the increase in inflation can be accounted for via the increase in oil + commodity prices. Core CPI hasn’t gone up by much.

“Surging inflation” is not a real threat to the stock market and economy right now.
1 am: Small cap is at previous high resistance. A short term bearish factor for the stock market.
Small cap stocks, as denoted via the Russell 2000 Index – have led the stock market’s rally. The Russell 2000 Index is now at prior high resistance. Perhaps it will make a small short term pullback at this resistance before heading higher. If it does, the S&P 500 will also make a small pullback.

Keep in mind that the Dow has gone up 6 days in a row and VIX has gone down 6 days in a row. So a 1-2 day small pullback in the stock market would not be unexpected.
But if the Russell 2000 doesn’t make a small pullback and instead breaks out, then it will rally higher and probably drag the S&P 500 to its 2780 resistance.

1 am: Initial Claims are still trending lower. Medium-long term bullish for the stock market.
The latest for Initial Readings is unchanged from the previous week’s reading.

But the key point is that Initial Claims are still trending lower right now.
*Initial Claims lead the economy and stock market. Historically, Initial Claims trended higher before a bear market in stocks started (see study).
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet.
HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

1 am: Commercial and Industrial Lending is weak. NOT a bearish sign for the economy and stock market.
Bearish investors have sounding the alarm on falling Commercial and Industrial Lending growth for the past 2 years.

They see this as a bearish sign for the economy and stock market. It isn’t.
Understanding the logic behind an economic indicator is just as important as understanding the leading/lagging relationship. You can see that this indicator has had false bearish signs in the past (e.g. see 1980s).
Commercial and Industrial Lending ISN’T falling because businesses are spending less money and investing less in their operations. Lending is falling because businesses are awash in cash (partially thanks to the tax cut) – they don’t need to borrow money to expand their businesses.

In fact, businesses are increasing their capital expenditures. But instead of funding it with loans they are increasingly funding it with a windfall of cash.

Read Stocks on May 10, 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.
  3. 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.
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. Hey Troy! Could you explain why you only make your daytrades at closing?
    Thanks

  2. Hi Troy
    Looks like Usd basket has held at 92.4… just wondering if it does go up to 94 then that indicates short term downside for Spx500…
    Kind of lines up with short term bearish market call.. you have been right so far …

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