*As a Xmas gift to y’all, I built a Day Trading Model for the U.S. stock market. I’m running 5% of my capital on this model and I’m posting the trades here.
*These are my short term discretionary thoughts on the market. My model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.
Stock index & news
- Ignore the potential government shutdown.
- A medium term problem.
- This is not a long term problem for the U.S. stock market.
4 pm: Ignore the potential government shutdown
The U.S. government will potentially shutdown in the next few weeks as the Republican tax bill makes its way through Congress. Historically, government shutdowns have had a mixed impact on the U.S. stock market. In other words, this is mostly an irrelevant factor for both the short and medium term.
If the government does shutdown in the next few weeks, any S&P 500 reaction will be random. There is no cause-and-effect relationship.
2 am: Don’t confuse medium term problems with long term problems.
As of the end of October 2017, the current rally is the longest rally in history without a 6%+ “small correction”. That’s why I think the S&P will make a 6-10% correction in Q1 2018 and break this record. This is a medium term problem for S&P bulls.
2 am: This is not a long term problem for the stock market.
This chart has been going around the financial world recently.
Looks scary doesn’t it? “The stock market will crash soon! It’s in a huge bubble!”
Well no. This is not a long term problem for the U.S. stock market. There are 2 reasons why allocations to stocks today are much higher than it was during past bull markets:
#1: Interest rates are historically low. In the 1950s, 60s, and 70s, househlds kept much of their wealth in bonds (government bonds, corporate bonds) because interest rates were much higher. With interest rates historically low, bonds just aren’t attractive to the average Joe. In other words, central banks have forced the middle class to buy stocks by depressing bond yields. This is the so-called “reach for yield”.
#2: There has been a significant change in the mentality of investors over the past 60 years. Most investors in the 1950s and 1960s lived through the Great Depression. Many of these investors at the time vowed to never touch stocks again. The idea of “contributing to a pension and investing in stocks” really only became mainstream in the 1980s! The 401(k) only came into existence in 1978!
In other words, allocating 40% to stocks today is equivalent to allocating e.g. 25% to stocks 50 years ago. Investors today are much more open to the idea of investing in equities than investors 50 years ago. This is a significant cultural shift.
So if you really think about it, allocating 36.3% of total financial assets to stocks isn’t a “bubble”. That’s just 1/3 of financial assets going to stocks.
In terms of my short term discretionary outlook, here’s what I think will happen.
- I think the S&P will make a small 6-10% correction in Q1 2018.
- Then the S&P will make a new high, before making a multi-month consolidation or multi-month “small correction” in the 2nd half of 2018.
- 2018 will be much chopper than 2017. As of October 2017, this is the longest rally in history without a 6%+ “small correction”. If you haven’t already, please read What will the S&P do after rising 8 consecutive months.
I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.