U.S. stock market on May 31, 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

Are we starting to see some cracks in the U.S. stock market? Perhaps. When a “small rally” becomes this aged (historically speaking), any number of reasons can bring the market down. Many of the reasons that normally have zero impact on the market will start to become triggers that push the S&P 500 down.
At 9:45 am today the Chicago PMI said that the index fell. Normally the market doesn’t care about the Chicago PMI – it’s a third tier indicator that doesn’t reflect the state of the U.S. economy. But today, the S&P instantly sank 17 points on this news. And when the Chicago PMI later announced that it made a mistake and that the Index had actually increased, the market didn’t par back its losses.
Who knows when the next small correction will begin. Any meaningless news can bring the market down – it’s just an excuse for selling. It might be now, might be in July, might be in August, or might be in September. But one thing is for certain. There will be a small correction 2017, and that will be a great buying opportunity for the longs.
“Weak breadth” is not a problem. We are starting to see the sectors rotate, with previously lagging sectors now leading. Sector rotation was common in 2013 when the S&P soared 30%! In May 2017, utilities, tech, and consumer discretionary led the rally while financials and energy hurt the S&P.
There were 2 interesting pieces of news today:

  1. Comey will testify publicly as early as next week to confirm allegations that Trump pushed him to end the Flynn investigation. The S&P fell a meager 5 points on this news. In other words, the market doesn’t care about this anymore. The market knows that Trump cannot be impeached for trying to end the Flynn investigation. Trump can only be impeached if, by trying to end the Flynn investigation, Trump was trying to cover up his own wrongdoings. So far, the FBI has not evidence of Trump’s own wrongdoings.
  2. China’s currency is surging. Many investors were concerned that China’s economy was deteriorating once again. We said that the recent deterioration in China’s data was merely a normal fluctuation, and that investors shouldn’t be alarmed yet. It looks like the Chinese government is going to step in and save China’s economy, currency, and stock market.

Meanwhile, the S&P 500’s 12 month forward earnings expectations are going through the roof. This is a long term bullish factor for the U.S. stock market.

Bottom line

We are sitting on 100% cash and waiting to buy UPRO (3x S&P 500 ETF) when the S&P completes a small 6%+ correction.
Who knows when the small correction will start. Any number of triggers/news that are normally meaningless can push the S&P down.
Our model does not foresee a significant correction or a bear market.

Sectors

Energy
Once again, the energy sector led the S&P down today. Perhaps the surging oil supply is weighing down on oil. Who knows. If so, the declining energy sector is a good excuse for the S&P to make a 6%+ correction.
First chart is WTI oil.

Second chart is XLE (energy ETF).

Finance
The finance sector put downwards pressure on the S&P as well. Just as we predicted, slightly lower interest rates are putting pressure on banks’ profits. JPMorgan announced today that its trading revenues thusfar for Q2 2017 are down 15%.
The U.S. 10 year Treasury yield has been falling. However, we don’t think rates will fall much more. (This is just a wild guess because we don’t trade bonds.) If rates don’t fall much more, then the finance sector will not be a big drag on the S&P 500.
First chart is the 10 year yield.

Second chart is XLF (finance ETF).

Tech
For the first time in a long time, the tech sector put downwards pressure on the S&P today. Tech is an irrelevant factor right now. Amazon slightly pulled back from its $1000 resistance today. But as we stated in today’s post, stocks usually don’t top around whole #’s like $1000. They tend to rally above whole #’s before topping.
First chart is XLK (tech ETF).

Second chart is Amazon.

 

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