Stocks on September 12, 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. The next bear market will be more like 2000-2002 than 2007-2009
  2. Don’t read too much into yesterday’s bullish outside reversal bar.
  3. JOLTS made a new high and is still trending higher. Bullish for stocks.
  4. Labor market conditions remain bullish for the stock market
  5. Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
  6. Foreign buyers aren’t bullish enough on U.S. equities. Suggests that the rally still has room to run.

Read We’re close to “as good as it gets”, but not quite there
1 am: The next bear market will be more like 2000-2002 than 2007-2009
Ray Dalio went on CNBC yesterday and said something very interesting:

The next crisis won’t be a big bang-type affair but one that leads to more severe social and political problems.

I agree with Dalio’s statement. The 2008 market crash was a financial catastrophe that could have led to a Great Depression. In fact, the 2008 financial crisis was VERY EASY to predict. A potential recession and housing crisis had been brewing for years before the market crashed in 2008.

A big-bang crisis similar to 2008 is very unlikely to happen today. There is less excess in the financial system. More importantly, the banks are well capitalized and have significantly reduced their leverage vs. 2008.
Instead, the next bear market is more likely to be a series of mini-crisis, one following the other. That’s why I think a 2000-2002 style bear market is more likely than a 2007-2009 style bear market.

  1. The 2000-2002 bear market went down in multiple waves with large bear market rallies along the way.
  2. The 2007-2009 bear market crashed in a vertical line.

1 am: Don’t read too much into yesterday’s bullish outside reversal bar.


Here’s an expanded look at the data.

This demonstrates that a lot of traditional technical analaysis (e.g. “outside reversal bar – a candlestick pattern”) is just reading the tea leaves.
1 am: JOLTS made a new high and is still trending higher. Bullish for stocks.
The latest reading for Job Openings went up a little from its previous reading. But more importantly, Job Openings are still trending higher.

This confirms the medium-long term bullish sign in Initial and Continued Claims. JOLTS is a leading indicator for the stock market and economy. This chart demonstrates the positive correlation between JOLTS and the S&P 500. An uptrend in JOLTS = an uptrend in the S&P 500.

1 am: Labor market conditions remain bullish for the stock market
The Kansas City Fed creates a Labor Markets Conditions Index, which is turned into a momentum indicator. This measures the strength of the labor market.
The U.S. labor market is healthy right now. This is a medium-long term bullish sign for the stock market right now. You can see the labor market conditions fell to zero at the top of previous bull market peaks.

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.
1 am: Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
The S&P 500’s net earnings revisions are still significantly positive.

The S&P 500’s Net Earnings Revisions turns negative before economic recessions and equity bear markets begin. During economic expansions, it has shown mixed performances because analysts tend to downgrade their earnings expectations as the year goes on. That’s why negative Net Earnings Revisions is a necessary but not sufficient requirement for equities bear markets and economic recessions.
Net Earnings Revisions is far from negative right now. A bear market is not imminent. HOWEVER, you can see that this data is trending downwards. It will likely turn negative in 2019.
1 am: Foreign buyers aren’t bullish enough on U.S. equities. Suggests that the rally still has room to run.
One of the questions I seen get thrown around a lot is “U.S. investors are already very bullish on the U.S. stock market – who’s left to buy”? The answer is “foreign buyers”.
Foreign buyers are a contrarian signal for the U.S. stock market – they tend to buy U.S. stocks like crazy at tops and sell stocks like crazy at bottoms. And right now, foreign buyers have yet to “buy like crazy”.

As you can see from the chart above, foreign buyers are just starting to turn bullish on the U.S. stock market. This is a nominal data series, which means that foreign buying is even lower than previous bull market peaks when adjusted for inflation. Foreign buying needs to get crazier before this “big rally” and bull market can end.
*Foreign buyers will likely increase their purchases of U.S. stocks as this trade war drags on. The U.S. stock market is going up while foreign stock markets (namely emerging markets) are falling.
Read Stocks on September 8, 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.

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