U.S. stock market on June 15, 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

Economic data continues to miss expectations.
Check out the historical study we did today. The bottom line is simple.

Based on where the Economic Surprise Index is today, the S&P is at most 4 months away from the next small correction. Perhaps it’s making a small correction right now.

This fits in with the TIME extreme. By October 2017, this will be the longest “small rally” in the S&P 500’s history.
The “buy the dip” mentality.
Over the past 2 weeks, every single dip in the U.S. stock market has been bought. When will this end? Who knows.
There’s been a lot of talk around the financial world as to what caused today’s decline. Here are some of the most ridiculous things I’ve heard.

  1. “The ECB’s dovishness caused today’s decline”. Lol what? Historically, the ECB has had zero impact on the S&P. Sometimes the S&P falls after an ECB meeting and sometimes it rises.
  2. “Trump-related news is pushing the S&P down”. We respectfully disagree. If Trump-news was a bearish factor, the S&P would have been falling for weeks by now. Instead, the S&P has rallied over the past few weeks.

We think the S&P will make a 6% “small correction” purely for technical reasons. This “small rally” has been overstretched. When a small rally becomes this overstretched, it can fall on any “reason”. All those “reasons” are just excuses that can’t push the S&P down under normal conditions. That’s why most of the historical small rallies had no fundamental reasons at all.
Previously, we said that the there won’t be much news coming out of the special counsel’s investigation into Trump-Russia. It’s not standard practice for the special counsel to comment on an ongoing investigation because he doesn’t want the public to misconstrue an incomplete investigation. But thanks to leakers in the government, “standard practices” have gone out the window.
The S&P is still following a standard pattern post-Fed meeting.
Yesterday, we demonstrated that the S&P has always fallen at least a few percent after each rate hike in the current rate hike cycle. The S&P is falling right now. It looks like this pattern is still very much in play.
We also said that investors/traders shouldn’t focus too much on this pattern. There have only been 4 rate hikes in this rate hike cycle. In the 2004-2006 rate hike cycle, the S&P sometimes fell and sometimes rose after a rate hike. In other words, rate hikes had no impact on the S&P.
What is our target?
We plan on shifting back to 100% long UPRO (3x S&P 500 ETF) once the S&P completes a 6% small correction. If the S&P is making a correction right now, where will it bottom?

  1. A 6% decline takes the S&P down to 2299. We’ll buy UPRO once the S&P hits this target. (We got out of our UPRO position when the S&P was at 2392).
  2. We think the most likely target is somewhere between 2280 and 2300. 2280 is the top of the consolidation range from December 2016 to January 2017. The S&P’s 200 day moving average is at 2278 and moving up more than 1 point per day.


We don’t use technical support/resistances when buying and selling. Historically, the odds of the S&P actually touching a support/resistance level has been 50-50. Unlike in the currency markets, standard technical analysis doesn’t work very well in the S&P 500.

Bottom line

Not much has changed. We’re waiting patiently.
Right now:

  1. Our model says that this is a big rally in a bull market. There is no significant correction on the horizon.
  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.

Sectors

The energy, finance, and tech sectors all sank today.
Energy
Energy sank because oil prices fell. Oil is very close to its May 5, 2017 flash-crash bottom. While oil has made new lows over the past few days, XLE hasn’t.
Here’s XLE (energy ETF).

Here’s WTI oil.

Finance
Despite rising interest rates, the finance sector fell a little today.
Here’s XLF (finance ETF).

Here’s the 10 year Treasury yield.

Tech
Over the past few days, the tech sector has been putting downwards pressure on the S&P. FAANG stocks have fallen. If the S&P is indeed making a small correction right now, then this small correction will be similar to that of September 2012. The September 2012 small correction was led by Apple’s decline. Apple soared before September 2012.
Here’s XLK right now (tech ETF).

Bitcoin.
Bitcoin tanked today. This is why you shouldn’t trade Bitcoin. Its crazy volatility kills both longs and bulls. Bitcoin is an asset, not a currency.

2 comments add yours

  1. Hello Troy,
    Thanks again for your very interesting articles.
    What do you think about Goldman warns of “Valuation Air-Pocket”, reported there : http://www.zerohedge.com/print/597653
    Finally, is this the main reason why FAANG stocks fall these last days?

    • I think Goldman is wrong. Yes, tech is now the biggest part of the S&P 500. However, it has been this way for the past 7 years! Tech is simply eating everyone’s lunch (e.g. Amazon vs retail). Tech valuations today are much lower than they were in 1999/2000.
      I don’t think the selloff is because of this. It’s just an excuse. Tech has had a big run up. During every historical runup, there are profit taking events. A few large funds/investors sell their shares to take profits, and the market sells off. Then other investors buy the dip, and the rally resumes.
      There’s no specific reason for the current selloff in FAANG. That being said, we’re still waiting for the small correction.

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