U.S. stock market on May 18, 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 U.S. stock market reacted today in a way that’s typical for post-crisis days. The S&P 500 went up, gold/silver went down and U.S. Treasury yields went up.
Based on a standard timeline, the special prosecutor’s investigation into Trump-Russia allegations will most likely take 6-9 months because there is a lot of complex information to sort out. So don’t expect any mind-blowing revelations until the investigation is over. In the meantime, the S&P will go down every once in a while on random investigation-related news.
This supports the case for a long and small correction like 2004. The S&P fell 8.8% from March-August 2004.

 
We’re not in the business of guessing day-to-day movements in the stock market. But remember that next Wednesday (May 25) is OPEC’s meeting and Comey’s investigation.

  1. Who knows if OPEC will extend its oil production cut at next Wednesday’s meeting. Saudi Arabia and Russia want to, but we’re not sure that the other OPEC nations will follow.
  2. To clarify: Comey’s testimony is primarily on Comey-Trump dealings and obstruction of justice allegations. Congress will not ask for information about Trump-Russia dealings, which is the special prosecutor’s job. On May 3, 2017, Comey already testified under oath saying that “obstruction of justice” by Trump never happened. So he probably will not drop any bombshell revelations in his upcoming testimony.

So here’s a random guess. If OPEC does extend production cuts next Wednesday, perhaps oil will make a 1 day rally? The impact of this extension on oil will be much weaker than the impact of November 30 2016’s OPEC production cut. This is because next Wednesday’s meeting will decide on the EXTENSION of an existing cut, not an INCREASED cut. In addition, perhaps the stock market will calm down and pop higher on next Wednesday’s Comey testimony. Both of these factors support a small temporary rise in the S&P 500.
But from a medium and long term perspective, nothing has changed.

  1. According to our model, this is still a big rally within a bull market. This is still a bull market because the economy continues to grow. Initial claims came in lower than expectated today (good for the economy).
  2. The U.S. stock market still faces risks that will cause a small 6%+ correction. Trump-Russia, oil weakness, etc.

It’s interesting that VIX barely fell today despite the S&P rising 0.5%. Some people think this is a bearish sign. They say this means that VIX will continue to spike and the S&P will continue to fall. We disagree. This is mostly an irrelevant signal. It is neither bullish nor bearish.

Sectors

Energy
The energy sector continues to be a drag on the broad stock index. Despite oil and the S&P both going up today, the energy sector ETF XLE was down for most of the day!
*The energy sector is still driven by oil prices.
As we’ve mentioned before, perhaps oil will top right here, or perhaps oil will top at around $51-$52. Who knows. But a big rally is unlikely. With oil production increasing, savvy investors like Jim Rogers think that oil will at least fall to $40. In such an event, energy sector earnings growth will decline. That will drag down the entire stock market.
Finance
The finance sector ETF XLF went up today because interest rates went up. Nothing surprising here.
Tech
After being crushed yesterday because investors feared that Trump and his tax plans were finished, the tech sector rose the most today. Nothing special here. Tech has always been the more volatile sector.

Bottom line

Nothing has really changed. We still expect a small correction (our model cannot predict small corrections – it only predicts significant corrections). However, we now think that this small correction will be long and drawn out like 2004.
We’ll most likely shift from 100% cash to 100% long UPRO (3x ETF for the S&P 500) when the S&P falls 6%.

2 comments add yours

  1. I was not thinking of how Trump’s adventure would impact markets – but of course they will. It will be very interesting to see how things unfold.

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