Thoughts

1. Banks’ lending standards are easing even more. Medium-long term bullish for the stock market.
2. The stock market’s valuation is not “at levels last seen at the top of the dot-com”
3. Durable goods is trending higher. Neither bullish nor bearish for the stock market.
4. The stock market’s sentiment is not excessively bullish even though it is going up.
5. Interest rates are rising, but the stock market and rates have a positive correlation right now. Rising rates aren’t bearish for stocks.

1 am: Banks’ lending standards are easing even more. Medium-long term bullish for the stock market.

The latest reading for Banks’ lending standards (released yesterday) demonstrates that lending standards are easing even more.

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Easing lending standards is a medium-long term bullish sign for the stock market and economy. It gives this aged economic expansion and bull market a little more juice via easier loans and more credit.

As you can see, lending standards tend to get tighter in the last rally of a bull market.

1 am: The stock market’s valuation is not “at levels last seen at the top of the dot-com”

One of the latest false narratives from CNBC is that “the stock market today is as overvalued as it was in 2000 – at the top of the dot-com bubble”.

This is based on the U.S. stock market’s price-to-sales ratio, which has exceeded its 2000 peak.

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In reality, valuing the stock market based on its price-to-sales ratio doesn’t make a lot of sense. How “valuable” a company is doesn’t depends on its sales (revenues). How “valuable” a company is depends on its earnings (profits). Likewise, how “valuable” the entire stock market is doesn’t depend on its revenues – it depends on how much money Corporate America makes.

The stock market’s price-to-sales ratio has gone up a lot faster than the price-to-earnings ratio merely because companies have higher profit margins – they are able to operate more efficiently. The S&P 500’s P/E ratio is a lot lower than where it was at the top of the dot-com bubble.

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Valuations today may be high, but it is not as high as it was at the top of the dot-com bubble.

1 am: Durable goods is trending higher. Neither bullish nor bearish for the stock market. 

The latest reading for Durable Goods went higher than the previous reading. But more importantly, Durable Goods are still trending higher.

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This is neither bullish nor bearish for the U.S. stock market in the medium-long term. Durable Goods is a coincident indicator, which means that it tends to peak when the U.S. stock market peaks.

1 am: The stock market’s sentiment is not excessively bullish even though it is going up.

The U.S. stock market (S&P 500) has been trending higher. However, sentiment is not excessively optimistic, which means that sentiment is not a headwind for the stock market right now.

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The AAII Bull/Bear ratio is one of the most widely used sentiment indicators for the U.S. stock market. The AAII Bull/Bear ratio isn’t excessively optimistic right now.

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1 am: Interest rates are rising, but the stock market and rates have a positive correlation right now. Rising rates aren’t bearish for stocks.

Interest rates are rising right now. This is neither short term nor medium term bearish for stocks.

The 10 year yield and S&P 500 have a positive 20 day correlation right now. Stocks and yields are going up together.

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The 10 year yield and S&P 500 have no correlation over a 63 day period (3 months).

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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 year left in this bull market.