Stocks on May 21, 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. What are the permabears smoking?
  2. Over 80% of IPO’s have negative earnings. Isn’t a bearish sign for the stock market right now.
  3. “Credit card delinquencies return to financial crisis levels” – not as bearish as it sounds for the economy and stock market.
  4. Banks’ lending standards are still very loose (and getting looser). A medium-long term bullish sign for the stock market.

Read Study: financial conditions are still too easy for the bull market to end
4 am: What are the permabears smoking?
Permabears love to take things out of context and make them seem worse than they really are. Here’s a really popular tweet that I completely disagree with.

This is wrong on multiple levels, and we can look at the data to disprove it.
For starters, real interest rates are still VERY low despite the Fed’s rate hikes (see study). The Fed needs to hike rates at least a few more times before it has a medium-long term bearish impact on the stock market and economy.
And yes, bond yields really are “popping”. The recent “surge” in interest rates is nothing close to 1973-1975 (high single digits), 1979-1980 (double digits), 1999-2000 (mid-high single digits), and 2006-2007 (during which rates flattened).

Oil is “soaring” alright. 1973-1975, 1979-1980, and 1989-1990 saw oil spike due to political shocks. Oil’s recently rally is due to mean reversion (after crashing from 2014-2016). Oil is still CHEAP when adjusted for inflation. (Real prices are more important than nominal prices).
In addition, rising oil prices don’t have the same negative impact on the U.S. economy and stock market as they did in the past. The U.S. is getting closer and closer to being energy-independent thanks to shale. (High oil prices hurt the U.S. economy in the past via imports. U.S. net oil imports are cratering today thanks to shale.)

4 am: Over 80% of IPO’s have negative earnings. Isn’t a bearish sign for the stock market right now.
This chart has been going around the financial world recently. It demonstrates that more than 80% of IPO’s have negative earnings, the highest since the dot-com bubble.

A closer examination of this chart demonstrates that it’s USELESS for picking bull market tops. For starters, this data series has been CONSISTENTLY elevated since the mid-1990s. So being out of stocks simply because of “IPO exuberance/hubris” means that you would have missed out on MASSIVE stock market gains over the past 20 years.
In addition, the difference between “% of IPO’s with negative earnings” in 2014 and “% of IPO’s with negative earnings” in 2017 is miniscule. This data series has been elevated throughout this entire bull market.
1 am: “Credit card delinquencies return to financial crisis levels” – not as bearish as it sounds for the economy and stock market.
Zerohedge came out with an article recently titled “Credit card delinquencies spike past financial-crisis peak”. And true to Zerohedge-form, they only focus on half of the fact (the bearish half).
The delinquency rate on credit card loans from Banks not in the 100 largest spiked past financial-crisis peaks. These are credit card loans from small banks. Meanwhile, the default rate on loans from Banks within the 100 largest are still very low.


The top 100 banks account for the VAST MAJORITY of loans. That’s why delinquency rates on credit card loans from ALL BANKS remain very low.

Delinquency rates are still too low for a recession and equities bear market to start.
1 am: Banks’ lending standards are still very loose (and getting looser). A medium-long term bullish sign for the stock market.
Everyone remains fixated on “when will rising interest rates hurt stocks and the economy”. Here’s the reality. Nobody knows at what level rates will hurt stocks and the economy, so stop guessing! Instead, focus on the current data.
Despite the Fed’s rate hikes, banks are actually loosening their lending standards!

This stands in direct contrast with previous bull market tops, which were preceded by multiple quarters of tightening lending standards. In addition, historical bear markets didn’t start when lending standards were as loose as they are today. This suggests that the equities bull market is not over.
Read Stocks on May 19, 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.

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