Stocks on September 7, 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 Insiders are dumping stocks. Here’s why you shouldn’t worry about this.
  2. Citigroup’s Panic/Euphoria Model continues to register “euphoria”. Watch out in 2019.
  3. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  4. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  5. Commercial hedgers (smart money) are extremely bullish on gold and silver.

Read The stock market’s recent pullback has been “orderly”. Is this bearish?
Read The stock market is experiencing “sector rotation”. Is this bearish?
1 am: Corporate Insiders are dumping stocks. Here’s why you shouldn’t worry about this.
A recent Bloomberg article caught my eye:

In other words, corporate insiders (who are supposedly “smart money”) are dumping their stocks even as their companies conduct massive share buybacks.

Is this bearish for the stock market? No. I would ignore this. Corporate Insiders are not “smart money”. They’re good at running their companies, not trading their stocks.
In fact, corporate insiders have been “dumping” their stocks pretty much throughout the entire course of this bull market.

  1. July 2018 from CNN: “CEOs are dumping stock in their companies. Here’s what that means”
  2. February 2017 from CNBC: “Companies are dumping stocks at levels ‘rarely seen’, report indicates”.
  3. March 2015 from Market Watch: “Tech insiders dumping stocks as their companies buy them back”
  4. March 2014 from Market Watch: “In-the-know insiders are dumping stocks”
  5. August 2009 from Reuters: “Bears prowl Wall St as insiders dump stock”


Corporate insiders are neither better nor worse than your average mom-and-pop as market timers.
1 am: Citigroup’s Panic/Euphoria Model continues to register “euphoria”. Watch out in 2019.
Citigroup publishes a Panic/Euphoria Model (sentiment indicator). It continues to register “euphoria” for the second month in a row.

Citigroup’s Panic/Euphoria model tends to turn bearish too early: specifically, 1-1.5 years too early. This supports the case for a major stock market top in 2019.
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 213k to 203k).  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 went down a little from the previous week’s reading (from 1.710 million to 1.707 million). 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.

1 am: Commercial hedgers (smart money) are extremely bullish on gold and silver.
The latest COT report reading demonstrates that commercial hedgers (smart money) remain extremely bullish on gold and silver.

Outlook

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

  1. 2018 will trend higher but will also be a choppy year.
  2. The S&P 500 has approximately 1 year left in this bull market (bull market top sometime in 2019).

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 big correction at this point in time. 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. COT bullish, no. Take a look at 1988 to 1993 and 1996 to 2001. They were more bullish during those declines than now. It is like overbought is not bearish. In the very long term the commercials were right but most of your readers are not massive long term accumulators. Enjoy your work.

    • Very true Kent. Hedgers are pretty much just like RSI. They by when “oversold” and sell when “overbought”. But you’re absolutely right. Oversold can be even more oversold.

  2. Troy,
    1. Contrary to your statement, both initial and continued claims trended lower before 1967 and 1973 recessions, and even after their start – your comments please?
    2. How long do you think sector rotation should last before we can consider it sustainable? 4-5 days like recently probably wouldn’t count.
    3. What, in your opinion, are the odds of a small correction till the end of year and, in particular, in September ?
    Thanks!
    Oskar

    • Hi Oskar,
      1. Initial Claims bottomed at the end of November 1968, pretty much at the same time as the stock market’s top. But if you look at the S&P, it came close to making a new high in May 1969, by which Initial Claims had already trended upwards. Initial Claims isn’t perfect, so I don’t use it in the Medium-Long Term Model.
      The 1973 bear market started very differently. It began as a “big correction” before turning into a bear market.
      2. I don’t quite see sector rotation as a bearish sign. It’s really hard to say. A few months? Of course, this is assuming the wheels don’t completely fall off of tech. I.e. if the Dow started to rally hard while tech craters (like in the first half of 2000), that would be bearish.
      3. I think it’s a 50-50 bet. So I don’t know. Small corrections are very hard to consistently and accurately predict. The January-February one was easier to predict, but that’s only because the rally in 2017 was extreme.
      Regards,
      Troy

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