Outlook For Stocks - Wednesday, May 16

Thoughts

1. Small cap stocks continue to lead large cap stocks. A medium-term bullish sign for the stock market.
2. High yield spreads continue to make new lows. A medium-long term bullish sign for the stock market.
3. Retail Sales growth: this bull market in stocks still has 1-2 years left.
4. GDP growth will pick up in Q2 2018. No bear market or recession in sight.

3 am: Small cap stocks continue to lead large cap stocks. A medium term bullish sign for the stock market.

Small cap stocks (Russell 2000) led the stock market higher from February – present.

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Despite rallying the most, small cap (Russell) fell the least during yesterday’s stock market pullback (small cap was almost unchanged while large cap fell). This is a sign of bullish price action and suggests that the leaders (small cap) continue to lead the stock market higher.

I predicted a pullback yesterday, and I don’t think this pullback will last long in terms of TIME.

3 am: High yield spreads continue to make new lows. A medium-long term bullish sign for stocks.

High yield spreads continue to make new lows despite the stock market’s correction from January 2018 – present.

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This is partially because high yield issuance (new supply) has declined.

This is a medium-long term bullish sign for the stock market and suggests that January 2018 wasn’t the stock market’s top. Bond market participants are smarter than stock market participants, which is why the bond market is a leading indicator for the stock market. Historically, high yield spreads widen before a bull market tops.

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1 am: Retail Sales growth: this bull market in stocks still has 1-2 years left.

Retail Sales increased 0.3% month-over-month (up 4.7% year-over-year). More importantly, the year-over-year growth in Retail Sales is still trending higher.

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This is typical of the final 1-2 years of an equities bull market and economic expansion. There are no signs of sustained economic deterioration right now, but the economy’s growth rate cannot really pick up. Growth is only trending higher a little bit. Retail Sales is a medium-long term bullish sign for the stock market right now. We are watching out for sustained deterioration in this economic data.

*The stock market and economy move in sync over the medium-long term.

1 am: GDP growth will pick up in Q2 2018. No bear market or recession in sight.

Q2 2018 GDP growth will probably be stronger than Q1 2018 GDP growth. For starters, Q2 is seasonally the strongest quarter for GDP growth.

In addition, import growth is slowing down in Q2 2018. Remember that imports are subtracted from GDP. This is a positive factor for U.S. GDP growth.

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.