Outlook For Stocks - Wednesday, May 30

Thoughts

1. The EU is unlikely to unwind and turn into a full-blown disaster for global stock markets.
2. The stock market’s seasonality in June is weak.
3. Truck Tonnage is still increasing. A medium-long term bullish sign for the stock market.

1 am: The EU is unlikely to unwind and turn into a full-blown disaster for global stock markets.

With increased uncertainty in Italy, some investors and traders are talking about the potential demise of the EU and how that would lead to a massive crash in global stocks. While such a possibility exists, it is very unlikely. Everything is possible in this world – what matters is probability.

Creating the EU took multiple decades. It did not happen overnight. Unwinding the EU and Euro will take at least a few years. Eurozone leaders will not create a problem for themselves by immediately disbanding the EU. Look at how long it’s taking Brexit to play out. Creating a political union takes years/decades, and unwinding a political union also takes years.

This means that there will not be a one-time event in which the Euro disbands and global stock markets crash. If the EU does decide to disband (which is a low probability scenario), it will do so in a slow and steady manner. The EU will make sure that there’s plenty of liquidity available to prevent a full-blown panic.

The stock market used yesterday’s Italian news yesterday as an excuse for selling off. Yesterday’s VIX study suggested that the stock market will probably face a little bit of short-term weakness. The S&P 500 has retested this trendline.

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1 am: The stock market’s seasonality in June is weak.

The S&P 500’s seasonality in June is weak. June is the 2nd weakest month of the year, on average.

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I wouldn’t read too much into seasonality – it isn’t that useful. Sometimes the stock market goes up during months that are “seasonally weak”. Sometimes the stock market goes down during months that are “seasonally strong”. Seasonality should be far down in the list of factors that you consider. The S&P 500’s average return in June is -0.18%, which isn’t that different from 0%.

1 am: Truck Tonnage is still increasing. A medium-long term bullish sign for the stock market.

The latest reading for Truck Tonnage increased from the previous reading. This is a medium-long term bullish sign for the stock market.

Truck Tonnage is a medium-long term leading indicator for the stock market and economy. Historically, Truck Tonnage trends downwards before an equities bear market and an economic recession begins. Truck Tonnage is trending upwards right now.

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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.