Stocks Outlook - Wednesday, August 15

Thoughts

1. SKEW is going up. Not consistently bearish for the stock market
2. Total Household Debt is rising. Not bearish for the stock market
3. Delinquency Rate is trending downwards. Medium-long term bullish for the stock market

1 am: SKEW is going up. Not consistently bearish for the stock market

SKEW represents the willingness of stock market traders to buy “crash protection”. When the SKEW Index spikes, conventional “wisdom” assumes that there’s a greater chance of a “black swan” event occurring in the financial markets.

SKEW just made a new all-time high.

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This isn’t as bearish for the stock market as you think. Our study demonstrates that SKEW has a spotty track record for predicting stock market crashes. There are a lot of cases in which SKEW spiked but the stock market didn’t crash. This indicator is not consistently accurate.

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1 am: Total Household Debt is rising. Not bearish for the stock market

The NY Fed’s latest report demonstrates that household debt is still going up. Contrary to what the permabears tell you, this is not a bearish factor for the U.S. stock market right now.

For starters, household debt ALWAYS goes up in the long term due to inflation. For example, total household debt is currently at $13.29 trillion. Total household debt at the peak of the financial crisis was $12.67 trillion. But in inflation-adjusted terms, total household debt today is $11.07 trillion in 2008 dollars.

More importantly, rising debt is not a problem as long as households can service their debt. Households have no problem servicing their debts right now even though debt levels and interest rates are rising. This is because disposable income is rising alongside with debt.

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Stock market investors and traders don’t need to be worried about a debt crisis right now.

1 am: Delinquency Rate is trending downwards. Medium-long term bullish for the stock market

Delinquency Rates on loans from commercial banks are still trending downwards.

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This is a medium-long term bullish sign for the stock market and economy. As you can see in the chart below, Delinquency Rates tend to trend higher before equity bear markets and economic recessions begin.

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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.