Stocks on September 26, 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. Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
  2. The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.
  3. China is unlikely to dump U.S. Treasuries to hit back at the U.S. during this trade war.
  4. Energy has gone up 11 days in a row.

Read Consumer Confidence: how much longer until the next bear market?
Read Is the stock market’s volatility about to spike in October?
1 am: Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
Corporate profits are still trending higher, even after adjusting for inflation.

This is a medium term bullish sign for the stock market. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “big correction” begins (see study)
1 am: The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.
Many traders like to guess when the unemployment rate will bottom and start to tick up. This is a silly exercise and waste of time. Any guess is just a guess – nothing more. A better measure of “full employment” = Unemployment Rate – CPI (inflation). As you can see from the following chart, this data series tends to approach 0 towards the end of an economic expansion and equities bull market.

The Unemployment Rate – CPI is currently at 1.21%, which means that:

  1. The economic expansion and bull market are not over, but…
  2. We are near the last leg of this bull market.

*The economy and stock market move in the same direction in the medium-long term.
1 am: China is unlikely to dump U.S. Treasuries to hit back at the U.S. during this trade war.
China has sold some of its U.S. Treasury bonds recently. However, it’s unlikely that China will aggressively dump its bonds in an attempt to hit back at the U.S. in this trade war.
China dumping U.S. Treasuries will further weaken China’s economy, which defeats the purpose.

  1. China purchases U.S. Treasuries so that the U.S. can buy Chinese goods. If China sells a lot of Treasuries, the U.S. will have to cut spending on Chinese goods even more. That would further hurt China itself.
  2. China selling Treasuries could cause the Yuan to appreciate, which would make Chinese goods more expensive. This would hurt Chinese exports and further hurt China itself.

At the end of the day, China doesn’t have a lot of good options during this trade war. The U.S. has the upper hand simply because the U.S. is a net importer while China is a net exporter.
1 am: energy has gone up 11 days in a row.
XLE (energy sector ETF) has now gone up 11 days in a row. This has only happened 1 other time before from 1998-present.
September 25, 2017.

As you can see, XLE faced some short term weakness over the next month, but over the next 6 months trended higher.
Yesterday we looked at what happens next when XLE goes up 10 days in a row.

*This is a small sample size study.
Read Stocks on September 22, 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.

6 comments add yours

  1. Thank you Troy for useful insight.
    I think that the graphic of corporate profits adjusted for inflation is one of the core-messages of your trading strategy: in long term economy and stock market go together, and most of the times they go higher.
    You hear lots of people saying every day that “The stock market has gone too high, ERGO it is time for a big crush”
    Maybe they are not considering that economy keeps improving, profits keep growing, until companies are innovating and creating stuff and ideas.
    p.s. I could not find that graph on Fred website, can you please post the url?

  2. Hi Troy,
    > BullMarkets.co is a subsidiary of Fundamental Capital, and independent investment research firm.
    When did that happens? Any info on what does this entail and what it means for you and your site?

    • Hi Mahn,
      Nothing’s changing. I just incorporate the website after setting up my own company. Don’t worry 🙂

  3. Troy, you made a typo in the chapter re: corporate profits:
    “This is a medium term bearish sign for the stock market. ” – should read bullish, not bearish – please correct

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