Stocks on May 9, 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. Sentiment continues to fall while the stock market consolidates. A bullish sign.
  2. The market’s weak reaction to a strong earnings season is not a bearish sign for the stock market.
  3. Rising oil prices are not yet bearish for the economy and stock market.

Read Study: falling Initial Claims is medium-long term bullish for the stock market
4 am: Sentiment continues to fall while the stock market consolidates. A bullish sign.
TD’s IMX Index (a sentiment indicator) continues to drop even though the stock market is consolidating sideways. It is now at its mid-2016 level. Click here.

This sentiment indicator (for retail traders and investors) is particularly useful – it doesn’t look at what traders SAY they’re doing. It looks at what traders are ACTUALLY doing by analyzing and averaging the holdings/positions, trading activity, and other data from real portfolios.
This is important because savvy investors were afraid that the stock market would need to fall a lot more in order to washout optimistic sentiment. Instead, the stock market is using a consolidation pattern to reset sentiment.
The longer the stock market consolidates, the more likely it is to breakout on the upside.

  1. Sentiment is being washed out by the stock market’s consolidation
  2. Fundamentals (the economy and earnings) continue to trend higher. Fundamentals = the stock market’s “fair value”. Improving fundamentals = the stock market’s “fair value” is trending higher, which means that the stock market will eventually follow and also breakout on the upside. “The economy is not the stock market” is true on a month-to-month basis but is not true in the long term. The stock market follows the economy.

Trying to predict precisely when the stock market will breakout is meaningless. Nobody can consistently and accurately do so. All you can do is predict the stock market’s direction.
The longer the stock market consolidates, the more likely it is to breakout on the upside because “fair value” (the fundamentals) are improving.
4 am: The market’s weak reaction to a strong earnings season is not a bearish sign for the stock market.
Q1 2018 has been an extremely strong quarter for corporate earnings. 78% of companies have beaten earnings estimates and 77% of companies have beaten sales estimates, even though expectations for this quarter were already very high. This is the highest % of earnings beats since 2008.
But the stock market has gone sideways despite such strong earnings. The bears view this as a bearish sign for the stock market. It isn’t.

This study demonstrates that the stock market doesn’t always go up on strong earnings growth and that it doesn’t always fall on weak earnings growth. In other words, there is nothing inherently bearish about the stock market not going up on strong earnings growth. What the stock market does after earnings season has little to do with what the stock market does during earnings season.
Earnings is used as a LONG TERM indicator. The increase in corporate earnings is a LONG TERM bullish factor for the stock market (see study). Its impact on the stock markets short-medium term is mostly random.
1 am: Rising oil prices are not yet bearish for the economy and stock market.
With WTI oil prices hovering around $70, the bears believe that “rising energy costs will start to hurt the economy and stock market”. I disagree.
The absolute value/price of oil is irrelevant. The inflation-adjustsed price of oil is more important.

The inflation-adjusted price of oil is still low – almost 40% below where it was just 4 years ago. Oil must rise A LOT more to start hurting the economy and stock market.
But more importantly, the U.S. is becoming increasingly energy-independent thanks to shale. Rising oil prices would have been a big drain on the economy in the past – the U.S. sent more and more money to OPEC when oil prices went up. Rising oil prices have a much smaller negative impact on the economy today – money is merely being transferred from domestic consumers to domestic producers of oil.
Read Stocks on May 8, 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. 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.

2 comments add yours

  1. Dear Troy,
    thanks for sharing this useful article.
    Reflecting on your final outlook, where you foresee
    – a higher close of index by the end of 2018
    – another 6% correction
    that means that market should go up quickly and reach new ATH
    you also state that usually the last part of a bull market (where we are now, since it has 1 or 2 years left) is often exponentially going up
    I am wondering … there is actually quite a few time to make all this sequance of strong movements: up in the short term, then another 6%+ correction, then up again by the end of the year, a final exponential growth
    … don’t you think that your long-term outlook is now getting closer to be a short-term prediction?
    And I do agree with you, short terms predictions are quite meaningless.

  2. I would like to add a picture to express myself better, I’ll send it to you by email

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