U.S. stock market on June 2, 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.

Stock index & news

The White House confirmed that Trump is reviewing whether he’ll try to block next Thursday’s Comey testimony. Logically speaking, Trump won’t block the testimony. Doing so will look very suspicious and doesn’t help Trump at all. Watch out for next Thursday’s testimony.
Today’s big news was the “weak” jobs report. Yes, the headline # (138k actual vs 185k expected) missed expectations. But this is normal. In the final quarter of economic expansion cycles, employment growth always slows down a little. Hence, employment growth in 2017 will likely be lower than employment growth in 2016, 2015, 2014, 2013, etc. There is nothing “shocking” or “bearish” about this.
Here’s are 2 simple examples:

  1. Employment growth slowed down long before the bull market topped in 2000. Private jobs growth was 3212k in 1997, 2734k in 1998, 2718k in 1999, and 1687k in 2000.
  2. Employment growth also slowed down before the bull market topped in 2005. Private jobs growth was 2328k in 2005, 1883k in 2006, and 859k in 2007.

Make no mistake. Our model states that this is the final quarter of this bull market. We have at least 1-2 years left, and possibly 2-3 years. Our model’s bull market end-date target changes as the data changes.
People are concerned that initial claims and the unemployment rate are too low. We said that this is not a concern. Initial claims and the unemployment rate can flatten at the bottom for a year before starting to rise. The unemployment rate is still falling (down to 4.3%).
The S&P 500 ignored today’s weak jobs report because historically speaking, the market can go up whenever it wants as long as it’s a big rally in a bull market (as defined by our model). There is a natural bullish bias. We aren’t surprised that the market didn’t fall on today’s “bearish” news.
In addition, the yield curve is flattening a bit. As we said yesterday, the yield curve ALWAYS starts to flatten as we approach the final quarter of the bull market and economic expansion. There is nothing bearish about this. It merely confirms the market stage that our model predicted.
Perhaps the small 6%+ correction that we’re predicting will happen after June 14’s Fed meeting. Since this rate hike cycle began, the S&P fell at least a little after every rate hike. Chart courtesy from Urban Carmel.

If the Fed hikes rates on June 14 and this pattern holds, then the S&P will fall after June 14.
If the Fed doesn’t hike rates on June 14, then this pattern is irrelevant.

Bottom line

Our model still says that this is a big rally within a bull market.
We’re still going against our model and sitting on 100% cash. We’re still waiting to buy on the next 6%+ small correction. When the “small rally” is this aged, anything can bring it down. We just don’t know exactly when.

Sectors

There was nothing abnormal within the sectors today. The energy and finance sectors underperformed because oil and interest rates fell.
The tech sector outperformed because Amazon has gone above its $1000 resistance as we predicted.

2 comments add yours

  1. You made a great job!
    I was arrived to the same conclusions about work employment and the end of this bull market (1.5 to 3y from now, and much probably 1.5 to 2y). In my case, I’m working on daily predictions for the nasdaq-100 index with three states : long/flat/short. I compute a daily forecast, available 1 day (and a half) before the opening.
    I only use “short” state during prolonged economic crisis periods, based on employment level. Very interesting to read yours contributions and cross the points of view.

    • We do the same. In a bear market, we only start to short when the economy deteriorates significantly. That’s when it’s a guaranteed bear market.

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