Stocks on September 22, 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.
The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

  1. This week was options expiration week. Short term weakness next week?
  2. Ignore the Smart Money Flow Index
  3. Housing Starts went up and are still trending higher. Medium-long term bullish for the stock market and economy.
  4. Building Permits fell. Stock market investors should watch out if this falls lower.
  5. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  6. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Read Slow and steady has returned to the stock market. This is a bullish sign
1 am: This week was OPEX (options expiration) week. Short term weakness next week?
This week was options expiration week. Historically, the week after September OPEX (i.e. next week) has been historically weak.

  1. Since 1990, the S&P has fallen 22 out of 28 weeks.
  2. Since 1982, the S&P has fallen 25 out of 36 weeks.

This is a very short term market study. I don’t pay too much attention to the short term because no matter how much conviction you have, the short term is rarely better than a 50-50 bet.
1 am: Ignore the Smart Money Flow Index
The Smart Money Flow Index states that “smart money” trades during the last hour while the “dumb money” trades during the first hour. The Smart Money Flow Index adds the Dow’s daily close $ and subtracts the Dow’s daily 10 am price. This means that if the market opens high and closes low, the “smart money” must be selling. More details here 
The S&P 500 has been trending higher from February 2018 – present while the Smart Money Flow Index has trended lower. Some financial analysts continue to see this as a bearish sign for the stock market. That is a very myopic view.

The Smart Money Flow Index has A LOT of flaws once you look at the data holistically. We have the data here.
The Smart Money Flow Index can fall for years (if not a decade) while the stock market goes up. For example, the Smart Money Flow Index fell throughout the ENTIRE 1960s while the U.S. stock market went up.

I think Ben Woodward summed this up nicely:

1 am: Housing Starts went up and are still trending higher. Medium-long term bullish for the stock market and economy.
The latest reading for Housing Starts went up from its previous reading (1174k to 1282k). However, the key point is that Housing Starts are still trending higher.

The economy and stock market move in the same direction over the long run. Housing is a leading indicator for the U.S. economy. Hence, an improving Housing Starts is a medium-long term bullish sign for the U.S. economy and stock market.

This chart demonstrates how Housing Starts leads the S&P 500.

1 am: Building Permits fell. Stock market investors should watch out if this falls lower.
The latest reading for Building Permits fell from 1303k to 1229k.

While Building Permits are still trending upwards, watch out in case Building Permits continue to fall. Historically, Building Permits trended downwards before recessions and bear markets began.


Moral of the story: don’t be too concerned about the recent decline in Building Permits, but watch out in case this situation worsens.
1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Initial Claims made a new low for this economic expansion (fell from 204k to 201k).  The key point is that Initial Claims are still trending lower right now.

*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).

We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.
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.

Flipping the Initial Claims axis makes the inverse relationship between Initial Claims & the S&P very clear.

1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Continued Claims made a new low for this economic expansion (fell from 1700k to 1645k). But the key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued 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.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.
 

Flipping the Continued Claims axis makes the inverse relationship between Continued Claims & the S&P very clear.

Read Stocks on September 19, 2018: outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P 500 has approximately 1 year left in this bull market (bull market top sometime in 2019).
  2. I will scale out of my long positions throughout 2019 (see why)

I am 67% long SSO right now (2x S&P 500 ETF) because my Medium-Long Term model does not foresee a big correction or bear market at this point in time. (This is a step down from being 100% long SSO previously). I ignore small corrections. I only sidestep big 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. Hi Troy, Does the short term trading model change its % or change of direction shortly before the close or is it only after the close.
    RAY

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