Stocks on May 2, 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. VIX is unusually low compared to where the S&P is. A medium term bullish sign for the stock market.
  2. The stock market isn’t extremely overvalued when you consider interest rates and inflation.
  3. The Mueller investigation will not become a medium-long term bearish factor for the stock market.
  4. ISM Manufacturing Index fell, but is still trending higher. Not yet bearish for the stock market, but watching out.

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1 am: VIX is unusually low compared to where the S&P is. A medium term bullish sign for the stock market.
The S&P is more than 5% below its January 2018 highs. Meanwhile, VIX has spiked and has now fallen below 16.
This is a medium term bullish sign for the stock market (historically speaking).

Remember what I said yesterday: the smart money is still bearish on VIX, which implies that they’re bullish on stocks.
I’m not particularly a fan of VIX-related studies because VIX’s history is limited (only goes back to 1990). But at the very least this isn’t a bearish sign.
1 am: the stock market isn’t extremely overvalued when you consider interest rates and inflation
Bears frequently point to “exorbitant valuations” to support their bearish case right now. But the reality is that you must consider interest rates and inflation when thinking about “overvaluation and undervaluation”.
The stock market isn’t extremely overvalued once you consider interest rates. The S&P’s 12 month forward P/E ratio is less than 17. Historically, this is a NORMAL valuation when the 10 year yield is between 2-4%.

The bears argue that “the Fed is hiking interest rates”. Yes, this is true. But even if the Fed hikes rates by 3 more times in 2018, the 10 year yield is unlikely to break above 4% this year.
Valuations are also rather normal right now when you look at inflation. Inflation is rising right now, but there are no signs of “surging” inflation.

1 am: The Mueller investigation will not become a medium-long term bearish factor for the stock market.
As the investigation into Trump’s ties with Russia intensifies, Mueller is reportedly thinking about the possibility of a subpoena to force Trump to talk.
If Trump is ultimately impeached (worst case scenario), is this a medium-long term bearish factor for the stock market? I don’t think so.
If Trump is impeached, Mike Pence will merely be a continuation of Trump’s existing policies. I don’t think Pence will reverse the tax cuts and deregulation that Trump has brought about. The stock market might fall for a few days on Trump’s impeachment news, but I don’t think Trump’s impeachment will have a long-lasting medium-long term bearish impact on the stock market.
People often state “Nixon’s impeachment proceedings caused the 1973-1974 bear market and recession”. That is not true. The 2 things occurred at the same time.
The 1973-1974 bear market and recession was due to the OPEC oil embargo. Nixon’s impeachment clearly didn’t have a positive impact on the economy, but it didn’t have a significantly bearish impact on the economy either. Correlation (2 events existing at the same time) is not causation.
1 am: ISM Manufacturing Index fell, but is still trending higher. Not yet bearish for the stock market, but watching out.
The latest ISM Manufacturing reading fell (for the 2nd month in a row), but overall the data series is still trending higher.


This is not yet a medium-long term bearish sign for the U.S. economy and stock market. Historically, ISM Manufacturing trends lower by a significant amount before a bear market and recession begin. We’re watching out for further signs of deterioration in this data.
Read Stocks on May 1, 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. Hi Troy, European markets was relative stronger than S&P 500 (e.g., higher returns, smaller drawdowns) in recent 1 month.
    Have you done any analysis on relative strength of US vs. International markets before?

  2. From historical perspective ISM has peaked 2 months ago , so the only way it goes is down now . But certainly it will depend on how it goes down .

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