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


*These are our short term thoughts on the market. We invest purely based on our medium-long term model. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.

Stock index

Once again, the economic data today (retail sales and CPI) demonstrated that the U.S. economy is in a long term “Goldilocks” state of economic growth. The economy is growing and interest rates are still very low. This means that the U.S. stock market is still in a bull market.
However, there has been a tiny dip in the data over the past 2 months. We predicted this, so it comes as no surprise.

  1. The headline inflation rate has dipped a little over the last 2 months (from 2.7% year-over-year to 2.2% year-over-year). This should not surprise anyone. Inflation has a strong correlation with the year-over-year change in oil prices, which has fallen a little over the past 2 months.
  2. Retail sales growth also slowed down a little bit due to slightly lower oil prices (gasoline is a volatile component in retail sales).

The S&P tried to rally at 8:30 am on this bullish economic news, but failed. Short term bearish sign? Perhaps.

Sectors

Once again, nothing unexpected happened in the S&P 500’s sectors today.
Energy
The energy sector is still bearish.
Oil went up a little today, so the year-over-year change in oil prices also increased a little. Despite these bullish factors, XLE (energy ETF) fell more than the S&P 500 today!
This shows that XLE’s downwards channel is still very much in play. XLE falls whenever it reaches the resistance trendline. Here’s XLE’s daily chart.

Oil rigs continue to rise. Oil rigs is a lagging indicator. For example, rigs continued to rise until 2015, even though oil prices started to crash in mid-2014.
As we have mentioned in a previous blog post, XLE’s declines often lead the S&P 500’s small corrections. So XLE’s bearishness is still a bearish factor for the S&P 500 in the short-medium term.
Finance
Interest rates got crushed today, and this had nothing to do with oil. (10 year yield down 3%, oil marginally higher).
Before today’s 8:30 am CPI and retail sales data, rates had already fallen. But today’s slowing CPI number killed rates. The 10 year Treasury yield crashed. Here’s an hourly bar chart for the 10 year yield.

As you can imagine, XLF (finance ETF) got hammered as well. This fits with our short-medium term bearish theme:

A temporarily slowing inflation will cause interest rates and economic growth to deteriorate a little.

However, long term interest rates are still going up. The U.S. held a 30 year Treasury bond auction on May 11, and demand was poor. (Falling bond prices = rising interest rates).
Technology
Once again, the tech sector went up despite the broad S&P’s weakness. Since its earnings report, Apple has risen 7%. This is to be expected. History shows that the tech sector is neither a leading sector nor a lagging sector for the S&P 500. Tech tends to outperform the S&P when its earnings reports are good, and tech corporate earnings have been on fire recently.
XLK (tech sector ETF) went up almost 0.3% despite the S&P falling 0.15%.

Bottom line

Various day-to-day signs still predict that a small S&P 500 correction will happen very soon. But we remain 100% long because we don’t trade our short-medium term outlook. Our model remains bullish on the U.S. stock market in the medium and long term.

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