Outlook For Stocks - Thursday, May 31

Thoughts

1. The bad days in 2018 have been really bad. Not a bearish sign for the stock market.
2. Households’ net worth continues to make new highs. A medium-long term bullish sign for the stock market and economy.
3. Smart Money Flow Index has been falling year-to-date. Not a medium term bearish sign for the stock market.
4. Consumer Confidence is still trending higher. A medium-long term bullish sign for the stock market and economy.

1 am: The bad days in 2018 have been really bad. Not a bearish sign for the stock market.

Bloomberg published an interesting article a few days ago demonstrating that the “bad days” year-to-date in 2018 have been really bad.

The average down day this year has been 21% bigger than the average up day.

But as I’ve demonstrated before, high volatility is neither a bullish nor bearish sign for the stock market.

There is nothing meaningful about a year that starts off with high volatility. This does not “hint at” a mega-crash or bear market. This is an irrelevant factor for the medium-long term.

The average DOWN day tends to be bigger than the average UP day when the market experiences more volatility (e.g. 2018). This is just stating a fact. It has no predictive power. It’s like saying “building something good takes 10 years, but it can be destroyed in a day”. Sayings such as “the market takes the staircase up and the elevator down” are merely descriptive – they have no predictive power.

1 am: Households’ net worth continues to make new highs. A medium-long term bullish sign for the stock market and economy.

The Federal Reserve releases quarterly data on Households and Nonprofit Organizations’ Networth. Dividing by CPI gives us real (inflation-adjusted) networth.

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As you can see, inflation-adjusted Households Networth tends to fall for at least 2 quarters for an equities bear market and economic recession begins. Households’ Networth has been trending higher, which is a medium-long term bullish sign for the stock market.

1 am: Smart Money Flow Index has been falling year-to-date. Not a medium-long term bearish sign for the stock market.

The Smart Money Flow Index states that “smart money” trades during the last hour while the dumb money trades during the first hour. The Index adds the Dow’s daily close $ and subtracts the Dow’s daily 10 am price. This means that if the market opens high and closes low, the “smart money” must be selling.

I keep seeing pundits talk about how the Smart Money Index’s decline year-to-date in 2018 is a medium term bearish sign for the stock market. It isn’t. This is the S&P 500’s Smart Money Index, which is similar to the Dow’s Smart Money Flow Index.

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Perspective is everything. Zooming out to a bigger chart, we can see that the Smart Money Index almost always goes down when the stock market is rallying. The Smart Money Index almost always goes up when the stock market is in a bear market.

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As I said before, the Smart Money Index is too simplistic and has many flaws. The Smart Money Index going down isn’t a bearish sign for the stock market. It merely confirms the stock market’s rally from late-2016 to present.

1 am: Consumer Confidence is still trending higher. A medium-long term bullish sign for the stock market and economy.

The Conference Board’s Consumer Confidence Index is still trending higher.

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This echoes the University of Michigan’s Consumer Confidence Index, which is also trending higher.

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Consumer Confidence is a leading indicator for the stock market and economy. It tends to trend lower before an equities bear market or economic recession begins. It is trending higher right now.

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.