*These are our short term discretionary thoughts on the market. We’re looking at how the market reacts to news, earnings, and other fundamental themes. Our models determine our trades.
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*We update this webpage throughout the day. Last updated 4 pm.
Stock index & news
- The S&P’s sector rotation.
- Why is the stock market’s volatility so low.
- This Friday’s jobs report.
The S&P’s sector rotation is real. Over the past few months, tech outperformed while finance underperformed. The reverse is now true. The tech is getting hammered while the finance sector is rallying.
- XLF (finance ETF) is up 1.34% today because interest rates went up.
- XLK (tech ETF) is down -0.71%
- XLE (energy ETF) is up 1.93% because oil went up today.
It’s usually difficult to know if “sector rotation” is a bullish or bearish sign. Sometimes it leads to a bearish outcome and sometimes it leads to a bullish outcome. On the bearish side, it can be interpreted as “the weak sector will eventually drag everyone down”. On the bullish side, it can be interpreted as “the S&P can’t fall because there are always buyers in a few select sectors”.
Right now the medium term bullish case seems more convincing. On June 28, the NASDAQ broke below its 200 day moving average after spending >100 days above that moving average. In the 6 historical cases when this happened, the NASDAQ 100 always continued to fall. In those 6 historical cases, the S&P fell 5 times and consolidated (flat) 1 time. That 1 time was 1995.
1995 was very similar to today. The NASDAQ fell a little more, but due to sector rotation, the S&P was completely flat. So perhaps the S&P won’t make a 6%+ “small correction” right now. Perhaps the S&P will consolidate until mid-July (Q2 earnings season) because sector rotation is very strong right now. Then the S&P will probably go up on a strong Q2 earnings season. If this case occurs, we’ll need to wait until September/October for a small correction.
*Oil and interest rates tend to rise in the last leg of a bull market. Thus the finance and energy sectors will outperform. Based on our medium-long term model, we are in the final 2-3 years of this current bull market.
Why is the stock market’s volatility so low?
The first half of 2017 has gone by with little volatility in the stock market. We explained that when the market experiences a period of exceptionally low volatility, the current “big rally” will continue for at least 1 more year. The market will not enter into a significant correction or bear market any time soon.
The stock market’s volatility is low for 1 simple reason: this is a “quiet year”. We define “quiet years” as multi-month periods in which there are no MAJOR concerns in the global financial markets. The stock market tends to SOAR with little volatility during quiet years. Think 1963-1964, 1995, 2013, etc.
*In the U.S. stock market, you do not need to predict major concerns in the future. The stock market lags bearish news. There is too much dumb money that ignores bad news until the bad news is so obvious that it can no longer be ignored.
2017 is a quiet year because there are no MAJOR concerns right now.
- Despite recent rumblings, we don’t think Trump wants a trade war. He’s a businessman. He knows that the Chinese president Xi Jinping has a lot of internal politics to deal with. Trump is probably using Xi’s moment of weakness to extract concessions from China. What are these concessions? Who knows. Trump and Xi will meet at the G20 meeting on July 7-8. Perhaps Trump wants China to put more effort into stopping North Korea. Trump has already expressed his displeasure at China’s lack of success on the North Korean issue.
- In early-2017, we were concerned that Merkel would lose Germany’s September election. If France had elected Le Pen and Merkel lost Germany, the EU would start to unravel. This is no longer a concern. Europe is far more left than America is right (on the political scale). At the moment, it looks like Merkel will win the election.
- The global economy continues to grow at a healthy rate. China is hosting a once-in-5-years party Congress this fall. President Xi is expected to consolidate party power. Based on our contacts in Beijing, Xi will likely make a fiscal push in late-2017, which will give China’s economy another boost.
In other words, the major political and global economic-slowdown concerns that hampered markets from 2015-2016 are gone.
Yes, there are some minor concerns right now. E.g. U.S. auto sales are going down. But there are always minor concerns, even during the best of years. If you focus on small insignificant things, you will turn into a perma-bear. Focus on the economy/market as a whole.
Of course, low volatility in the recent past is not indicative of low volatility in the future. When the S&P is in the final few years of a bull market, volatility tends to slowly creep higher before exploding during the next bear market.
Since this is still a bull market, we probably will not see a SURGE in volatility in the next few months (i.e. our medium-long term model does not see a significant correction happening in 2017).
Friday’s jobs report
A lot of traders are focused on Friday’s upcoming jobs report. We aren’t. We focus on the overall trend in the data and not the individual data. Much of the month-to-month fluctuations are random statistical noise.
We think there’s a >50% chance that this Friday’s jobs report will “miss” analysts’ expectations (i.e. 60%). Jobs growth tends to slow down in the final few years of a bull market and economic expansion, so jobs reports will miss expectations more often than beat expectations.
The S&P’s bull markets topped in March 2000 and October 2007. Employment growth topped long before that.
The U.S. experienced a recession in 1990. Employment growth peaked in 1988.
The U.S. had a double-dip recession in 1980. Employment growth peaked in 1978.
Nothing has changed since our our June 30 bottom line.
- Our medium-long term model says that the U.S. stock market is still in a “big rally within a bull market”. There is no significant correction on the horizon.
- We are sitting on 100% cash. Based on our Easy Trading model, the most risk-free and guaranteed part of the current “small rally” is over.
- We’re waiting for the next 6%+ small correction. Then we’ll shift into 100% long UPRO (3x S&P 500 ETF).