Stocks on May 12-13, 2018: weekend 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. Total outstanding mortgage debt is approaching 2008 levels. Doesn’t mean that a 2008 stock market crash will repeat.
  2. Oil & stocks are positively correlated. Rising oil prices are medium-long term bullish for the stock market.
  3. Advance-Decline line (breadth) has made a new all-time high. A medium term bullish sign for stocks.
  4. Companies will need to refinance a lot of debt in the next 5 years. This bull market in stocks doesn’t have a lot of years left.

Read Study: bear markets don’t start when real interest rates are this low
5 am: Total outstanding mortgage debt is approaching 2008 levels. Doesn’t mean that a 2008 stock market crash will repeat.
Total outstanding mortgage debt is approaching 2008 levels. This doesn’t mean that another 2008-like stock market and real estate crash will happen right now.

For starters, CPI is approximately 20% higher than it was in 2008. This means that total outstanding mortgage debt is still 20% lower than it was in 2008 when adjusted for inflation.
In addition, mortgages rates are still much lower than they were from 2006-2008. Servicing these mortgage payments is much easier today than it was from 2006-2008.


The real estate bubble today isn’t as bad as it was in the 2000’s.
4 am: Oil & stocks are positively correlated. Rising oil prices are medium-long term bullish for the stock market.
This chart demonstrates the long term correlation between oil and the S&P 500 (20 monthly).
Notice how the 2 markets have a strong positive long term correlation. This means that rising oil prices = medium-long term bullish for the stock market. This makes sense. The U.S. is closer and closer to becoming a net exporter of oil. Rising oil prices no longer have the same detrimental impact on the U.S. economy as they used to have.

4 am: Advance-Decline line (breadth) has made a new all-time high. A medium term bullish sign for stocks.
The NYSE’s cumulative Advance-Decline line (breadth indicator) has made a new all time high even though the stock market hasn’t.

Remember this study’s conclusion: once breadth gets close to making a new all time high, the stock market correction’s bottom was probably already in. Any short term pullback would not push the S&P to new lows.
With the cumulative Advance-Decline line having made a new high, we are even more assured that the stock market’s bottom is already in. Any pullback will be short and temporary.
1 am: Companies will need to refinance a lot of debt in the next 5 years, and debt service payments are rising. This bull market in stocks doesn’t have a lot of years left.
U.S. companies will need to refinance an increasing amount of their debt over the next 5 years (approximately 2/3 of total debt).

The old debt was issued over the past decade when interest rates were low. With interest rates on the rise, companies will issue their new debt at higher rates.

  1. Companies can easily service their debt today because payments are still low.
  2. Companies will find it harder to service their debt in a few years time when the interest rates on their loans increase.

This will probably be a long term bearish problem for companies and the stock market in a few years (probably 2 years).
Read Stocks on May 11, 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.

2 comments add yours

  1. Thank you Troy . Regarding debt service , there will be a loop feedback from Central Bank if higher rates cause pb in economy , i.e they will cut rates and easing again ?

    • Yes. But by the time they cut rates because the economy is falling, it’ll be too late. Rate cuts don’t stop recessions.

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