Stocks on May 5-6, 2018: weekend 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. Treasury yield is above the stock market’s dividend yield. NOT bearish for stocks.
  2. The private sector yield curve inverted = the bull market in stocks doesn’t have many years left.
  3. Jobs Report and Unemployment Rate: a medium-long term bullish sign for the stock market and economy.

Read Study: what happens when a death cross has occurred for 8 months
1 am: Treasury yield is above the stock market’s dividend yield. NOT bearish for stocks.
This chart seems to get tossed around a lot. It demonstrates that for the first time in 10 years, the short term Treasury yield has crossed above the S&P 500’s dividend yield. This is supposed to imply that stock market investors will run for the safety of bonds.

As I explained in a previous post, this is not a bearish sign for the stock market. The short term Treasury yield has been above the S&P 500’s dividend yield for most of history.
Comparing the Treasury yield with the dividend yield doesn’t make much sense. Stocks are yield bearing assets, but they don’t issue all of their “yields” as dividends! Companies retain a lot of their earnings. That’s why it’s better to compare the Treasury yield with the S&P 500’s earnings yield. The S&P’s earnings yield stands above 4% right now, which puts it comfortably above U.S. Treasury yields.

1 am: The private sector yield curve inverted = the bull market in stocks doesn’t have many years left.
The private sector’s yield curve essentially measures how “risk on” investors are for corporate bonds. With corporate bond yields falling, the private sector yield curve has inverted.
This suggests 2 things:

  1. A bear market in stocks does not have to be imminent. You can see that the private sector yield curve was consistently negative throughout most of the second half of the 1990s. This SELL signal had false flags in the past.
  2. We are late in the current economic expansion and equities bull market.


This supports the case that the current equities bull market doesn’t have a lot of years left.
1 am: Jobs Report and Unemployment Rate: a medium-long term bullish sign for the stock market and economy.
While jobs growth continues to trend sideways, the Unemployment Rate continues to trend downwards.

The trend in the unemployment rate is a medium-long term bullish factor for the stock market and economy. Historically, the unemployment rate tends to trend sideways or upwards before a recession and bear market begins.

Read Stocks on May 4, 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.

5 comments add yours

  1. While i don’t think the treasury yield moving above stocks is a death knell for stocks, it does make one think about valuations a bit more especially when it comes to dividend payers.
    We’ve had a few years where valuations of companies like P&G have shot up quite a bit despite no growth and they’ll definitely be impacted as yields continue to rise and the market prices them back down to fair value as the dividends are no longer as appealing.

    • That’s a very good point. I’ve been looking at dividend stocks recently, and a lot of them have fallen much more than the broad stock market.

  2. “We are late in the current economic expansion and equities bull market.”
    Does this means, private sector yield curve should inverted earlier?
    nick in taiwan

    • It means that this economic expansion and bull market don’t have a lot of years left. E.g. 1-2 years, and not 3-4 years.

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