Stocks on May 3, 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. 2018 is on track for a record value in M&A deals. Not a sign of excess in the stock market.
  2. The USD and stock market are moving inversely. A short term bullish factor for the stock market.
  3. Earnings growth will start to fall in the second half of 2018. Supports the case that a bear market in stocks will start in 1-2 years.

Read Study: “Sell in May and go away” when stocks are down year to date
1 am: 2018 is on track for a record value in M&A deals. Not a sign of excess in the stock market.
2018 is on pace to a record year for M&A deals thanks to the Trump tax cut.

Bearish investors see this as a sign of stock market “excess”. It isn’t. It’s been 10 years since M&A last hit a high. Historically, M&A ALWAYS goes up over the long term. The value of M&A is actually down from 2007 highs on an inflation-adjusted basis.

1 am: the USD and stock market are moving inversely. A short term bullish factor for the stock market. 
The S&P 500 and USD have an inverse correlation. This isn’t immediately obvious when you use the correlation formula, but is very clear when you look at a multi-month chart.


Keep in mind that the USD has broken out from its range and has already hit its first resistance level. There is a much stronger resistance at 94. If the USD rallies to this resistance, the stock market will fall a little more but its downside is limited.

1 am: Earnings growth will start to fall in the second half of 2018. Supports the case that a bear market in stocks will start in 1-2 years.
Morgan Stanley’s leading indicator for earnings suggests that earnings growth will start to fall in the second half of 2018.

Remember what I said on April 30: the stock market tends to peak AFTER earnings growth peaks.
Read Stocks on May 2, 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. 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, I’ve noticed you’ve removed your prediction of a second correction this year from your outlook. Did something change your mind?

    • Hi Mahn,
      That prediction was only valid if SPX makes a new high pretty soon. If SPX bounces around this way into Q3, I don’t think there will be another correction this year. I think SPX will rally in Q4.
      Basically, the second correction prediction was supposed to say that the S&P would be volatile this year

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