U.S. stock market on May 23, 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

Some people were shocked by today’s weak New Home Sales.  It’s interesting that all 4 housing indicators this month were weaker than expected (New Home Sales, Housing Starts, Pending Sales, Existing Home Sales). This temporary weakness matches the fact that Citigroup’s Economic Surprise Index has been deteriorating. However, overall housing is still improving. Focus on the overall trend and not the month-to-month fluctuations. Housing is still a medium-long term bullish factor for the U.S. stock market.
Here’s the New Home Sales chart.

There is a new bearish factor
We have been looking for bearish factors that will trigger a small 6%+ correction in the S&P 500. Aside from the fact that this is one of the longest small rallies in history, we only had 1 bearish factor thus far:

  1. Rising oil production will hurt oil prices. Falling oil prices will put downwards pressure on the energy sector, which will hurt stocks.

But perhaps we now have a 2nd bearish factor: Trump-Russia investigation.
The worst case scenario is that all the Trump-Russia allegations turn out to be true. That will probably cause a significant correction in which the S&P 500 will give up all of its post-election gains. In this case, our model will have failed to predict the significant correction, which will be its 3rd failure in 67 years. (Right now our model does not foresee a significant correction).
The S&P futures crashed to 2028 on Trump’s election night. If Trump is impeached and forced to resign, 2028 is a likely target. Here’s the chart S&P 500’s futures chart.

A bear market will not ensue if Trump resigns. The U.S. economy continues and WILL CONTINUE to grow with or without Trump. Mike Pence will just be a lame duck president like Obama in his 2nd term. The economy will improve on its own.
However, we don’t think this worst case scenario will happen. The FBI has been investigating the Trump-Russia allegations for many, many months. If there really was anything that incriminated Trump in clear black-or-white terms, they would have nailed Trump already.
Instead, it’s likely that the Trump was involved in some gray areas with Russia. Here’s the logic:

If Trump is crystal clean, why does he need to beef up his legal defence and prepare for possible impeachment?

News update: Trump is close to picking outside legal counsel for the ongoing Trump-Russia investigation.
In addition, former CIA director John Brennan said that he was concerned about “possible interactions” between members of the Trump campaign and Russia’s intelligence agencies. Brennan doesn’t have any solid proof, but he is concerned.
We think that Trump has something to hide. However, we don’t think that “something” is enough to prove collusion, impeach Trump, and force him to resign. Perhaps that “something” has to do with Trump’s business dealings with Russia. Trump is the first president not to release his tax returns.
*This is all random speculation.
The continuing cloud that hangs over this administration can be the trigger for a small 6%+ correction. We don’t think this cloud will cause a significant correction.
The S&P’s reaction to Trump-news right now is completely normal. The S&P always lags the bad news and fundamentals. The news/fundamentals will deteriorate first while the S&P ignore the news and continues to rise. Then the S&P will fall when the bad news cannot be ignore. That has been the pattern historically.


There was nothing notable going on in the individual sectors today.
Oil went up a little today, so the energy sector ETF XLE went up a little.
The finance sector was the leader today because interest rates went up. The year-over-year change in interest rates impacts banks’ profit margins. However, you can see that interest rates are still at the low end of their range. Here’s the 10 year Treasury yield chart.

Information technology
The tech sector performed in line with the S&P 500 today.

Bottom line

Who knows when the small correction will begin. We now have 1 additional short-medium term bearish factor.

  1. This is still one of the longest stock market rallies without a small correction in history.
  2. Our model does not foresee a significant correction or a bear market. Based on our discretionary outlook, we agree with our model.
  3. Oil is still a risk to the S&P 500.
  4. Trump is a new short-medium term risk to the U.S. stock market. This risk is enough to cause a small correction but is not big enough to cause a significant correction. But if Trump is impeached and forced to resign, you should expect a significant correction.

2 comments add yours

  1. Troy, What do you make of Comey’s postponement of his testimony after Memorial Day? Do you think he has bought time to make peace with his family and have one last holiday at peace without the media glare knowing the shitstorm to follow after a “tell all” testimony? Does this mean the likelihood of President impeachment has increased?

    • I don’t think he has enough to impeach Trump, but I think he has enough to cause Trump a lot of trouble. Trump probably engaged in some gray areas. Remember that it’s very hard to impeach a president, so unless the evidence is overwhelming that Trump did collude with Russia, he probably won’t be impeached and forced to resign.

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