U.S. stock market on June 7, 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

Comey released his opening statement today to the Senate ahead of his testimony tomorrow. By the looks of it, we don’t see anything shocking in his opening remarks. There’s nothing that implicates Trump. But our opinion on politics is unimportant. We’re often wrong on politics. What’s important is the market’s reaction to this news.
Yesterday, the S&P went down, gold/silver went up, and interest rates went down. That was a classic “safety haven” play. The market’s reaction today to the Comey news tells you that the market isn’t really concerned about tomorrow’s testimony.

  1. The S&P went up a little.
  2. Gold went down.
  3. Interest rates went up.

So perhaps we were wrong. Perhaps Comey’s testimony tomorrow will not be the trigger for the small correction that we predicted.
The second thing to note today is oil’s mini-crash. WTI oil got crushed today on news that U.S. oil inventories rose unexpectedly. This was a rather large increase in inventories after weeks of declining inventories.
We think that oil is close to hitting bottom.
WTI oil has almost retested its flash-crash low on May 5. Here’s the chart.

The S&P continues to diverge with XLE. (The S&P is going up while XLE is going down). We mentioned this in a previous post:

Initially, a divergence between XLE and the S&P is bearish for the S&P. But when the divergence lasts too long, XLE is no longer a bearish factor for the S&P. It becomes a bullish factor for the S&P.

XLE will mean reverse sooner or later. And when that happens, it will be a bullish factor for the S&P 500.
The U.S. will hit its debt ceiling before Congress’ August recess. The fight between Republicans and Democrats is already under way. Historically, government shutdowns have not been a good predictor of S&P 500 corrections. For example, the S&P rallied throughout the October 2013 government shutdown. The S&P rallied in December 2012 despite “fiscal cliff” worries.
The market is not afraid of man-made problems that the government can solve in a heartbeat. Everyone knows that the debt ceiling fight is just a show that Washington needs to put on. The market is afraid of real uncertainty. The government shutdown is not real uncertainty. Everyone knows how the story is going to end.
What can bring the U.S. stock market down?
That’s a big question.

  1. Perhaps the Trump-Russia investigation will have no impact on the S&P 500.
  2. Falling oil and XLE are no longer bearish factors for the S&P 500.
  3. The debt ceiling is not a bearish factor.
  4. Economic growth is still decent.

We shifted our portfolio from 100% long UPRO (3x S&P 500 ETF) to 100% cash on May 13, 2017. This is one of the longest “small rallies” in history without a 6%+ “small correction”. Based on history, the S&P should begin a small correction before October 2017. That is the TIME extreme.
History shows that the most of the S&P’s small corrections don’t need any fundamental news or reason. I.e. the market can fall on its own without any “bearish” news. No bull market goes up in a straight line. Here are some examples.
2014
The S&P rapidly made a small correction in January 2014. Most of the selling was concentrated on 2 days. The correction ended as abruptly as it began.

2013
The S&P and U.S. economy were on fire in 2013. But even during the best of years, the S&P still made a 7.5% small correction from May 22 to June 24. There was no real news, but the S&P still fell for a month.

2006
The S&P made a small correction from May 5 – June 14. There was no news. Everything was quiet.

Some perma-bears think that the Fed’s easy money policy since 2009 has distorted the markets. They think that market volatility has shrunk. Any person who studies history knows that this isn’t true. The market is still making an average of 1-2 corrections each year. This pattern has held up since 1950. Daily and medium term volatility may have shrunk, but medium term volatility is still the same.
We focus on the medium-long term and not the short term.

Bottom line

  1. Based on our model, the optimal decision is to ignore all small corrections because no one can consistently and accurately predict the tops before all small corrections. Focus on the significant corrections and the bull/bear markets.
  2. Our model does not see a significant correction or bear market on the horizon.
  3. 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.
  4. We don’t know when the small correction will begin.

We’re up 17% year-to-date, so we can afford to wait and be patient. Like Warren Buffett said, the big money is made by “being right and sitting tight”.

Sectors

Energy
As you can imagine, today’s biggest loser was the energy sector. But there is a small bullish sign. Previously, the energy sector was much weaker than oil. E.g. if oil fell 2%, XLE would fall more than 2%.
But today, WTI oil fell 5% while the energy sector only fell 1.4%. Perhaps the energy sector’s selling is being exhausted.
Here’s XLE (energy sector ETF).

Finance
The financial sector led the S&P’s rally today because rates went up. Rates are at a massive support right now, and the financial sector is stronger than rates.
Here’s the 10 year yield. The 10 year yield is also at its 38.2% retracement of its July 2016 – March 2017 rally.

Here’s XLF (finance sector ETF).

Tech
The tech sector was inline with the S&P 500 today. Nothing abnormal.
 

2 comments add yours

  1. Have been a trader for 20+. Enjoyed your interview on 52 Traders. Relate to your style of trading.
    During the interview you said that, in a down move, one would be forced out of ES but not UPRO. Is this because of the margin requirements of the ES vs none for UPRO?
    Also, do you ever trade the inverse ETF of the UPRO, the Ultra Short?
    Glenn

    • Exactly. That’s the advantage of leveraged ETF’s. As a trader, you have to be able to hold until you’re right. Margin can force you to cut at the bottom.
      We haven’t traded the inverse yet, and will not do so in the next bear market. We’ll trade the 1x short using our model. Volatility is high in bear markets, so you need to watch out for erosion.

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