Stocks on May 4, 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. The stock market’s triple bottom is not a sign that it will break lower.
  2. A “Treasury supply shock” will have a limited impact on the bond and stock markets.
  3. Initial Claims are still trending lower. Medium-long term bullish for the stock market.

1 am: the stock market’s triple bottom is not a sign that it will break lower.
The majority of 10%+ small corrections (like the current one) end in a V shaped bottom or a W shaped bottom (i.e. crash, bounce, retest).
The current correction is not playing out this way. Although the S&P is still bouncing along a rising trendline + 200sma, it is getting closer to making a triple bottom.

Contrary to what some traders might believe, triple bottoms aren’t inherently bearish for the stock market. Some historical corrections have indeed bottomed this way.
This is the 1994 “small correction”. Notice how it also came close to making a triple bottom. Clearly this was not a medium-long term bearish case.

This is the 2015-2016 “significant correction”. The S&P almost made a “quadruple” bottom.

In short, more retests of the stock market’s bottom does not mean that the market is more likely to breakdown. This is not a particularly meaningful technical pattern.
1 am: A “Treasury supply shock” will have a limited impact on the bond and stock markets.
The U.S. Treasury’s annual borrowing needs are expected to soar above $1 trillion by 2020 amid tax reductions and higher fiscal spending.
Bank of America believes that:

  1. There is adequate demand to meet this supply shock for now.
  2. The combined effect of the Fed’s balance sheet unwinding and a potential decrease in foreign purchasing to push the 10-year Treasury yield to 3.25 percent by year end. This is BofA’s bearish scenario.

We need to put things into perspective. Even a year-end target of 3.25% means that interest rates will still be historically low.

I don’t expect rate increases to hurt the stock market and economy in 2018. Rates will still be too low by the end of 2018. But I think rate increases will start to hurt stocks and the economy in 2019 (rates will be higher by then).
1 am: Initial Claims 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 set a low in the previous week, which means 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.
This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet.
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.

Read Stocks on May 3, 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.

Leave a Comment