Stocks on May 18, 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. High earnings growth is not as bearish for the stock market as CNBC claims.
  2. Mortgage rates are rising. Probably will not be a repeat of the 2008 crisis.
  3. Initial Claims went up a little but are still trending lower. Medium-long term bullish for the stock market.
  4. Continuing Claims made a new low. Medium-long term bullish for the stock market.

3 am: High earnings growth is not as bearish for the stock market as CNBC claims.
CNBC published an interesting study yesterday demonstrating that the stock market’s forward performance is weak when earnings growth is as high as it is today.

*Earnings growth is currently >20%, so this study suggests that the stock market will most likely be flat over the next year.
This study clearly contradicts our previous study. Why?
CNBC’s study is leaving out a critical fact: earnings growth tends to exceed 20% in the first year after a recession ends. For example, earnings growth was very strong in 2010, 1 year after the recession ended in 2009. This makes sense. Earnings growth will be massive because the comparison vs a recession is very easy (earnings crater during recessions).
The stock market usually faces trouble during the 2nd year after a recession. So the order of events looks like this:

  1. It’s a recession, and earnings crater.
  2. 1 year after the recession, the stock market surges and earnings growth is very high.
  3. The stock market struggles in the 2nd year after the recession, so the stock market’s performance is weak despite such “strong” earnings growth.

Clearly this case doesn’t apply to today. It’s been 9 years since the last recession. Earnings growth is only this high due to the Trump tax cut.
Hence, I don’t think such strong earnings growth is a medium-long term bearish sign for the stock market today. Same symptoms, different diagnosis.
3 am: Mortgage rates are rising. Probably will not be a repeat of the 2008 crisis.
Mortgage rates are rising right now, causing some pundits to sound the alarm about a repeat of the 2007-2008 housing crisis.

I disagree. Mortgage rates are rising, but so are wages. This means that higher mortgage payments are still serviceable.

That’s why delinquency rates on single-family homes haven’t gone up yet.

The odds of another housing-led stock market crash are low right now.
3 am: Initial Claims went up a little but are still trending lower. Medium-long term bullish for the stock market.
The latest reading for Initial Claims went up a little 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. This is why the Initial Claims Trading Model states that investors and traders should be long stocks right now.
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.

3 am: Continuing Claims made a new low. Medium-long term bullish for the stock market.
Like Initial Claims, Continuing Claims is a leading indicator for the stock market and economy.
Continuing Claims just made a new low for this economic expansion, which suggests that the bull market in stocks and economic expansion aren’t over.


Read Stocks on May 17, 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 will 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.

5 comments add yours

  1. hey troy
    did you stop to weekly update the model on this page ??
    thanks gert

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