U.S. stock market on June 12, 2017: thoughts and outlook

*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
Go to our homepage for our latest market outlook.

Stock index & news

There are no global political fears.
Italy’s anti-EU party suffered an embarrassing defeat in local election. Hence, you can also ignore Germany’s upcoming election on September 24, 2017. Europe has proven itself to be more liberal and pro-establishment than the U.S. (e.g. Dutch election, French election).
U.S. stock market investors can no ignore geopolitical fears.
No, the “bubble” in tech isn’t bursting.
The NASDAQ and tech stocks fell again today. And just like that, a lot of investors are concerned that overvalued tech stocks are about to crash.
We think they’re wrong. In every bull market, there are many shake outs, consolidations, and corrections before the market tops. Bubbles don’t go from start to finish in one straight line. Hiccups along the way are perfectly normal.
Yes, tech stocks are expensive (i.e. above long term historical average valuations). However, valuations are nowhere near as exorbitant as they were at previous bull market tops. Most of the exorbitant valuations are in the private markets (i.e. venture capital funded companies). Think Uber, Airbnb, etc.
You cannot use “animal spirits” and sentiment to predict market tops. For example, animal spirits were “exuberant” as early as 1995, 5 years before the U.S. stock market topped in 2000! Morgan Stanley partner and board member Barton Biggs said in 1995 “stocks are extremely overvalued. This is a bubble. A bear market is imminent”. Boy was he wrong.
Use a quantitative approach. “Feelings” like “animal spirits” are useless for market timing.
U.S. commercial and industrial loans are collapsing
Corporate loan growth in the U.S. is collapsing. At the current rate that loan growth is falling, loan growth will turn negative within a few months. Historically speaking, the U.S. economy always entered into a recession months before loan growth turned negative.
Hence, the perma-bears are screaming “the U.S. economy has entered into a recession right now! By the time loan growth turns negative, we will have been in a recession for months!” Here’s a chart.

They are wrong.

  1. As we explained in a previous post, loan growth is an extremely lagging indicator. It doesn’t “lead to a recession” or bear market.
  2. The U.S. isn’t anywhere close to being in a recession right now. None of the other economic data supports this bearish hypothesis.
  3. Investors should focus on the data as an aggregate. At any point in time there will ALWAYS be positive and negative data. It’s not possible for all the data to be positive or for all the data to be negative.
  4. Focus on the big and popular economic indicators (e.g. employment reports, retail sales, industrial production, housing, PMI) and not the esoteric ones. The popular indicators are popular for good reason. The esoteric ones tend to give a lot of false signals.

The economic data continues to miss expectations
The Citigroup Economic Surprise Index looks at the recent economic data vs. analysts’ expectations. The data continues to miss expectations.

We’re not too worried about this:

  1. Historically, declines in the Citigroup Economic Surprise Index have not been timely predictors for the S&P’s corrections. See post.
  2. The economic data only impacts the S&P in the medium-long term. Focus on “is the data improving vs last month/quarter/year” and not “is the data beating/missing analysts’ expectations”. Expectations aren’t important. Don’t get caught up in the Wall Street game.

There’s a lot of important economic data coming out this week:

  1. Wednesday: Retail Sales, CPI, Fed meeting (rate hike?)
  2. Thursday: Industrial Production, Initial Claims
  3. Friday: Building Permits, Housing Starts

Bitcoin has been on a wild ride recently. Here’s a daily chart.

This is exactly why you shouldn’t trade a bubble from the long or short side. Crazy volatility will wipe out both sides.

Bottom line

Perhaps this is the beginning of the small correction that we’ve been looking for. The tech sector is leading the S&P’s decline.
Right now:

  1. Our model says that this is a big rally in a bull market.
  2. Despite our model’s bullishness, we’re sitting on 100% cash. Here’s why.
  3. We’re waiting for the next 6%+ small correction.

Be patient. The stock market will begin a small correction within the next few months and then bottom. Our model knows that this isn’t a significant correction, so the risk/downside is limited. Once the market bottoms, we’re going to leverage up by going to 100% long UPRO (3x S&P 500 ETF). The big money is made by:

  1. Being patient and waiting for good opportunities.
  2. When a good opportunity presents itself, go for the jugular and swing for a home run.


Over the past few days, the S&P 500’s sectors have started to rotate. The energy sector lagged the S&P significantly over the past few months. Over the past few days, the energy sector has outperformed. Oil went up as well today.
In addition, the energy sector has gone from underperforming oil to outperforming oil. Classic mean reversion.
Here’s XLE (energy sector ETF).

Like the energy sector, the finance sector outperformed the S&P today. Interest rates went up a little. Finance has gone from an underperforming sector to an outperforming sector.
Here’s XLF (finance ETF).

The tech sector led the S&P’s decline today. Nothing to note here.
Here’s XLK (tech ETF).

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