Outlook For Stocks - Thursday, May 17

Thoughts

1. China INCREASED its Treasury holdings in March. There’s no real medium-long term trade war risk for the stock market.
2. Equity Put/Call Ratio is very low. A short-term bearish sign for the stock market.
3. Housing Starts fell a little but are still trending higher. Medium-long term bullish for stocks.
4. YoY change in Industrial Production is still trending higher. Supports the long-term bullish case for stocks

5 am: China INCREASED its Treasury holdings in March. There’s no real medium-long term trade war risk for the stock market.

Traders and investors were afraid that China would dump U.S. Treasuries in retaliation for Trump’s tariffs. Here’s the latest data: China actually INCREASED its Treasury holdings.

Here’s China’s Treasury holdings, in billions of $

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Perhaps China is waiting to see if the U.S. will actually enact tariffs. But the point here is that neither party really wants a trade war. These were all just threats before both parties got to the negotiating table.

A full-blown trade war is extremely unlikely. This isn’t a medium-long term risk to the stock market.

5 am: Equity Put/Call Ratio is very low. A short-term bearish sign for the stock market.

The Equity Put/Call ratio just fell to 0.5. This sentiment indicator demonstrates that traders are too bullish on stocks right now. This is historically a short-term bearish sign for the stock market.

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Note: this indicator is not a medium-long term bearish sign for the stock market. It’s only meant to be used for the short term.

I think the stock market is going up in the medium-long term, but its short-term weighs towards the downside.

3 am: Housing Starts are still trending higher. Medium-long term bullish for stocks.

Housing Starts decreased a little from the previous month’s reading (1287k vs 1336k). However, the important point is that Housing Starts are still trending higher and made a new high for this economic expansion just recently.

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The economy and stock market move in sync over the long run. Housing is a leading indicator for the U.S. economy. Hence, an improving Housing Starts is a medium-long term bullish sign for the U.S. economy and stock market.

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3 am: YoY change in Industrial Production is still trending higher. Supports the long-term bullish case for stocks

Industrial Production expanded 3.5% from a year ago. Industrial Production growth is still trending higher.

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This is more of a medium-long term bullish sign than a bearish sign. Sometimes Industrial Production and the equities bull market peak together. But most of the time Industrial Production growth decreases before an equities bear market begins.

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Outlook

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

1. The S&P has made a 6%+ “small correction”. This will not turn into a “significant correction”.
2. 2018 will trend higher but will also be a choppy year.
3. The S&P 500 has approximately 1-2 years left in this bull market.