U.S. stock market on June 6, 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.
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Stock index & news

We use correlation in our discretionary outlook to identify themes that are driving global markets.
Ahead of Comey’s testimony on Thursday, the markets made a classic “safety haven” play today:

  1. The S&P went down.
  2. Gold went up. Gold also went up a lot more than silver today. In the long term, gold goes up on an “inflation” theme. But in the short term (i.e. a few days) gold can go up on a “safety haven” theme. Gold often spikes for a few days during a “safety haven” play and then falls.
  3. Treasury rates got crushed.
  4. *Normally the USD goes up on a “safety haven theme” (remember how the USD spiked in 2008). But so far, the USD and interest rates have been going down together. The main driver of today’s USD weakness was USDJPY.

This is one of the longest “small rallies” of all time. Hence, a 6%+ “small correction” can begin at any time within the next few months. Small corrections don’t usually need triggers. They can happen for purely technical reasons. But perhaps the trigger for this small correction will be Comey’s testimony on Thursday.
Correlations show that the market is already set up for a “safety haven” play on Comey’s testimony. During this safety haven play, we think:

  1. The U.S. stock market will go down with interest rates. (Previously we said that interest rates can’t fall much more because smart money COT hedgers are extremely bullish on rates. However, this is a medium term signal. It doesn’t mean that rates can’t fall in short term. Rates have been falling since we made that prediction a few days ago).
  2. Perhaps the S&P 500 and rates will go down along with oil. (Oil and rates have a slight positive correlation right now).

These 2 correlations have existed throughout 2017.
Here’s the 20 day rolling correlation between SPY (S&P 500 ETF) and TLT (10 year Treasury bond ETF).

*Interest rates are the inverse of TLT. So when the TLT-SPY correlation is negative, the interest rates-S&P 500 correlation is positive.
As you can see, the positive correlation between the U.S. stock market and Treasury rates has increased throughout 2017.
The overall positive correlation between rates and oil has been weak in 2017, as you can see in the following chart (TLT-USO). The correlation is primarily on a day-to-day basis.

As the S&P and interest rates go down, perhaps the U.S. dollar will continue to go down. There has been a significant positive correlation between the U.S. dollar and Treasury rates.
*The negative correlation between TLT (10 year Treasury ETF) and UUP (USD Index ETF) means there’s a positive correlation between yields and the USD.

Perhaps gold and silver will rise when rates fall. There has been a modest positive correlation between TLT and gold since 2016 (i.e. a negative correlation between rates and gold).

Bottom line

We don’t focus on other assets because we only invest in the S&P 500. We don’t understand other markets that well, so take our USD/rates/oil related thoughts with a grain of salt.
Perhaps the small correction will begin on Comey’s Testimony.

  1. Based on our model, the optimal decision is to be long right now, shift to 100% cash on Wednesday’s close (before the Comey testimony), then shift back to 100% long stocks after the Comey testimony. The optimal decision is to ignore all small corrections because no one can consistently and accurately predict the tops before all small corrections.
  2. We’re sitting on 100% cash right now and will continue to do so until the S&P makes a 6%+ “small correction”. Our discretionary outlook identifies an extreme short term risk.

It’s unlikely that this small correction will turn into a significant correction.

  1. Our model does not foresee a significant correction. Based on the current data, a significant correction is unlikely to happen until at least 2018.
  2. The U.S. economy is still strong.
  3. Provided that Trump doesn’t become impeached, the Republicans are still making progress on tax reform and infrastructure spending. The White House is looking for a vote on healthcare reform before Congress’ August recess. Then it’s looking for tax reform in fall.


Energy was the strongest sector today because oil suddenly spiked on no apparent news at 11:30 a.m.
Here’s XLE (energy sector ETF).

Here’s WTI oil.

The finance sector was weak today because interest rates fell. If interest rates fall as the S&P falls, then the finance sector will continue to be weak. The finance sector will lead the S&P’s small correction.
Here’s XLF (finance ETF).

Here’s the 10 year Treasury yield.

The tech sector was inline with the S&P today. Nothing abnormal here. After breaking out above $1000, Amazon fell to $1000 and turned this into support today.

Bitcoin has broken out from its consolidation range, just as we predicted. Our minimum targets for Amazon and Bitcoin have been fulfilled. No one knows when bitcoin’s bubble will top. But it shouldn’t be far in terms of time. We don’t trade Bitcoin or Amazon. We only trade UPRO (the 3x ETF for the S&P 500).

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