Stocks Outlook - Tuesday, August 21

Thoughts

*I’m introducing some new thoughts with the hashtag #PermabearParody. These thoughts will tell you what financial dogma to ignore.

1. The stock market’s breadth is rather strong. S&P 500’s equal-weighted index confirms the market cap weighted index.
2. #PermabearParody: the stock market is rallying on falling volume. Bearish for stocks!
3. #PermabearParody: gold is a safe haven. You should buy gold because of all the volatility in the stock market
4. #PermabearParody: this is the longest bull market in history. The stock market will crash soon!
5. #PermabearParody: David Stockman says that “the world market will crash!”

1 am: The stock market’s breadth is rather strong. S&P 500’s equal-weighted index confirms the market cap weighted index.

One of the biggest complaints I see on financial media is “the entire stock market rally relies on FANG. Without FANG, we’re all doomed”.

This is factually incorrect. The S&P 500 is a market cap weighted index. This means that big stocks will naturally have a bigger impact on the index than small stocks.

The market cap weighted index is near all-time highs right now.

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The S&P 500 has an equal-weighted counterpart. This means that FANG stocks don’t have an outsized impact on the equal-weighted index.

The S&P 500’s equal-weighted index is also near all-time highs. The stock market’s breadth isn’t “weak”. It’s not “just relying on a few big tech stocks”.

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1 am: #PermabearParody: the stock market is rallying on falling volume. Bearish!

The U.S. stock market is rallying on falling volume right now. This is bearish for the stock market, according to conventional technical analysis.

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Except conventional technical analysis is wrong. The stock market’s volume ALWAYS trends lower after it comes out of a correction. There is nothing bearish about the stock market rallying on falling volume. From what we’ve seen, volume is neither bullish nor bearish for the stock market. It’s a mostly irrelevant factor for the stock market (see study).

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1 am: #PermabearParody: “gold is a safe haven. You should buy gold because of all the volatility in the stock market”

You’ve probably heard the dogma “gold is a safe haven”. A lot of permabears have been bullish on gold from January 2018 – present because of all the stock market volatility in the U.S. and foreign stock markets. Has gold been a safe haven?

No, it hasn’t. Gold has tanked.

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Why is this? Because despite what financial dogma would have you believe, gold IS NOT a safe haven. There are plenty of historical cases in which gold fell alongside the stock market. Here are 2 recent examples.

Gold cratered in 2008 along with stocks.

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Gold fell in 2015, along with stocks.

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1 am: #PermabearParody: “this is the longest bull market in history. The stock market will crash soon!”

Not a day goes by in which you don’t hear “this is the longest bull market in history. The stock market will crash soon!”

Ed Yardeni published a fantastic video detailing why this is pure BS.

1. Records are made to be broken. Bull markets and economic expansions don’t die of old age, the same way humans don’t have a “die by age XYZ” date. Bull markets, like humans, don’t have an expiry date.
2. This is the longest bull market in history (based on conventional measures) simply because this will soon be the longest economic expansion in history. With U.S. economic growth at 4%, a recession in the near future is pretty much impossible. The economy doesn’t suddenly reverse course from 4% growth to negative growth in the span of a few months.

1 am: #PermabearParody: David Stockman says that “the world market will crash!”

And lastly, your favorite permabear David Stockman has gone on CNBC to predict that “the unhinged White House will cause a stock market crash”. He has predicted 50 of the last 1 stock market crashes.

Let’s take a trip down memory lane for all of his “doom and gloom” calls, shall we?

For the record, the S&P 500 is 141% higher today than it was in October 2010, when Stockman started to “sound the alarm”. So even if stocks crash 50%, the market will still be higher than when Stockman first turned bearish.

Anyone who listened to Stockman’s advice would have dramatically underperformed buy and hold.

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.