Thoughts

1. Being long VIX is a better idea than being short stocks in the last leg of an equities bull market.
2. The stock market’s recent rally lacks “broad support”. Not a bearish sign for the stock market.
3. Bitcoin is not leading the stock market lower.

1 am: Being long VIX is a better idea than being short stocks in the last leg of an equities bull market.

The Medium-Long Term Model believes that this bull market doesn’t have many years left (probably 1-2 years before it gives a “bear market” prediction). Investors and traders who want to buy protection should consider going long VIX during the final 1-2 years of a bull market instead of going short stocks.

VIX tends to rise during the final big rally of an equities bull market.

This is 2007. Notice how VIX trended higher even though the S&P trended higher as well throughout 2007 (even though it did so in a very choppy manner).

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This is VIX from 1998 to 2000. Notice the many spikes in VIX while the stock market trended higher in a very choppy manner.

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This means that the final few years of n equities bull market tend to be choppy ones, during which VIX will spike every now and then. This makes it easier to profit from VIX on the long side.

1 am: The stock market’s recent rally lacks “broad support”. Not a bearish sign for the stock market.

Some traders like to use “the % of stocks above their 50 dma or 200 dma” as a breadth indicator. In my experience, this isn’t very useful.

Bearish traders right now think that the stock market’s recent rally lacks “broad support”. Only 65% of stocks are above their 200 daily moving average.

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This isn’t a bearish sign for the stock market. There were plenty of historical stock market rallies that occurred without “broad support”.

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As you can see, it’s perfectly normal for only 65% of individual stocks to be above their 200 dma when the stock market is rallying. This happened in 2017, 2016, 2014, 2013, 2012, etc.

The Advance-Decline line is a better breadth indicator, and it’s sending a medium-term bullish sign right now (see study).

1 am: Bitcoin is not leading the stock market lower

You’ve probably seen charts which proclaim that Bitcoin is a leading indicator for the stock market. These charts suggest that Bitcoin’s current decline will lead the stock market lower.

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These charts are misleading because they confuse correlation with causation. Bitcoin and stocks are not driven by the same things. Bitcoin is mostly pure speculation on the part of traders. The stock market is fundamentally driven by the economy and earnings.

Yes, it’s true that the January-February 2018 stock market correction coincided with a decline in Bitcoin. But this is a correlation. It isn’t causation. There are historical cases in which Bitcoin crashed but the stock market rallied nonstop.

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Stock market investors and traders should ignore Bitcoin.

Outlook

Here’s what I think will happen based on my discretionary outlook.

1. 2018 will trend higher but will also be a choppy year.
2. The S&P 500 has approximately 1-2 years left in this bull market.