Stocks on May 14, 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. April was probably the stock market’s bottom. Momentum became very oversold in April.
  2. The road to a new all-time high won’t be easy. It’ll probably take at least a month.
  3. Buybacks are still far below 2007-levels. Not a sign that the equities bubble today = the equities bubble of the 2000s.
  4. The stock market usually goes up when the Fed is hiking rates.

Read Study: what happens next when the stock market goes up 8 days in a row
2 am: April was probably the stock market’s bottom. Momentum became very oversold in April.
Weekly momentum indicators are useful for predicting medium term turning points in the stock market. The S&P 500’S 14 weekly Stochastic became very oversold in early-April 2018. Except 1 case in 2011, this was a medium term bullish sign for the stock market.

1 am: The road to a new all-time high won’t be easy. It’ll probably take at least a month.
The Russell 2000 (small cap stocks) is approximately 0.5% below its all time high, whereas the S&P 500 (mid/large cap) is approximately 5% below its all time high. (In other words, small cap is leading mid/large cap).
When this happened (historically), it took the S&P 500 at least 1 month (21 trading days) to make a new all time high. This means that the S&P won’t rally straight away to new all time highs: it’ll make some pullbacks along its rally.
This is logical. If Russell (small cap) is leading the rally, then it’ll eventually hit a resistance somewhere and lead the S&P 500’s pullback.
1 am: Buybacks are still far below 2007-levels. Not a sign that the equities bubble today = the equities bubble of the 2000s.
Permabears love anything that resembles 2007 (the start of the last bear market). That’s why they’re pointing to this estimate:

The nominal value of corporate buybacks in 2018 will probably = the nominal value of corporate buybacks in 2007


But once again the permabears make 3 simple mistakes:

  1. The nominal value of corporate buybacks is meaningless. Real (inflation-adjusted) buybacks are still 20% below their 2007 peaks.
  2. Corporations are making much more money today than they were in 2007. The stock market’s capitalisation is much higher today than it was in 2007.
  3. There is nothing inherently evil about corporate buybacks.

In fact, buybacks as a % of market cap are not even close to 2007-levels.

1 am: The stock market usually goes up when the Fed is hiking rates.
Contrary to popular belief, the stock market usually goes up during a rate hike cycle. We demonstrated that in a previous study. You can also see it in the following chart.

Notice how the stock market goes up more often than it goes down during a rate hike cycle. This is inherently logical. The Fed usually hikes rates when the economy is growing. A growing and improving economy is bullish for the stock market.
Read Stocks on May 12-13, 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.

4 comments add yours

  1. Troy, What do you think of the strategy to be 60% invested in stocks, 40% in ultra short-term bond waiting for the next pull back before going into 100% stocks? By my reckoning, just a 5-7% pullback is enough in the high earnings growth for going back in so no need for a major correction?

    • Not a bad idea. But why not just hold cash instead of bonds if you’re just waiting for a short term pullback. Pullbacks don’t usually take too long in terms of TIME.

      • Cash is certainly viable option. The idea, however, is to earn a bit of a yield while waiting. Ultra-short term bond is somewhat subject to interest rate risk, but not so much as other bonds. This is more of a yield-play for the waiting period. Does it make sense?

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