Stocks Outlook - Friday, August 31

Thoughts

1. Corporate profits are surging, even without Trump’s tax cut. Medium term bullish for stocks
2. VIX is rising with the stock market. Not necessarily bearish for stocks.
3. Ignore these bearish stock market analogues
4. Commercial hedgers (smart money) are extremely bullish on gold and silver.
5. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
6. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

1 am: Corporate profits are surging, even without Trump’s tax cut. Medium term bullish for stocks

As you probably know, corporate profits are surging this year. Some people believe this is mostly due to Trump’s tax cuts. That’s not true.

Corporate profits are surging due to a combination of:

1. The extremely strong U.S. economy.
2. Trump’s tax cuts.

Corporate profits would be surging right now even without Trump’s tax cuts. From Bloomberg:

Strong earnings growth (even without Trump’s tax cut) is a medium-long term bullish factor for the U.S. stock market right now.

1 am: VIX is rising with the stock market. Not necessarily bearish for stocks.

Bloomberg published an interesting chart, demonstrating that the S&P is no longer moving inversely with VIX.

The last time this happened was in January 2018, right before the stock market made a “small correction”. Is this a harbinger of another “small correction” to come?

No. It’s very common for VIX to go up with the S&P when VIX is very low (VIX is lower-bound at approximately 10).

As you can see in the following chart, the 5 day correlation between the S&P and VIX is frequently positive. (The correlation was frequently positive in 2017, when the stock market soared).

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As you can see in the following chart, the 10 day correlation between the S&P and VIX is frequently positive. (The correlation was frequently positive in 2017, when the stock market soared).

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Same thing for the 30 day correlation.

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1 am: Ignore these bearish stock market analogues

Analogues and fractals aren’t particularly useful. You can fit, squeeze, stretch, and compress any market to “look” like another. In reality, the market doesn’t have a brain. It’s an inanimate object that has no intention to “copy” another market.

Here’s a recent bearish stock market analogue, brought to you by Zerohedge.

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The stock market always “looks like” it’s going to crash. In reality, crashes are few and far between.

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1 am: Commercial hedgers (smart money) are extremely bullish on gold and silver.

The latest COT report reading demonstrates that commercial hedgers (smart money) are extremely bullish on gold and silver.

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1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Yesterday’s reading for Initial Claims went up a little (from 210k to 213k). However, the key point is that Initial Claims are still trending lower right now.

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*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).

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We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.

This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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Flipping the Initial Claims axis makes the inverse relationship between Initial Claims & the S&P very clear.

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1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Yesterday’s reading for Continued Claims went down a little from the previous week’s reading (from 1.728 million to 1.708 million). But the key point is that Continued Claims are still trending lower right now.

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Like Initial Claims, Continued Claims lead the stock market and economy.

This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

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Flipping the Continued Claims axis makes the inverse relationship between Continued Claims & the S&P very clear.

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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 (bull market top sometime in 2019).