*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.
Go to our homepage for our latest market outlook.
*We update this throughout the day. Last updated 4 pm.
Stock index & news
- Stock market sentiment is not euphoric.
- Tech stocks valuations.
- Oil’s bottom.
- Flash crash in gold and silver today.
There’s no “euphoria” in the U.S. stock market
With the S&P having rallied 9% year-to-date, some investors are saying “stock market sentiment is too euphoric! Bubble!”
- Basing one’s gauge of sentiment on “feelings” is a terrible way to invest. Focus on the data.
- Sentiment is not a good market timing indicator.
- The best sentiment indicator is AAII. AAII is a broad survey, asking investors if they’re bullish, bearish, or neutral.
As you can see in the following chart, AAII bulls is quite low right now despite the rally in stocks!
*Based on conventional thinking, sentiment is used as a contrarian indicator. When bullish sentiment is too high, contrarian traders will short the market.
There’s a lot of money sitting on the sidelines because too many investors/traders are neutral.
There’s a peculiar situation in the market right now.
- Bullish sentiment is low.
- July seasonality is bullish.
- Q2 2017 earnings season (released in mid-late July) will probably be strong.
Hence, the odds favor a continued stock market rally in July.
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Tech stocks aren’t “insanely overvalued”
With tech stocks rising over the past few months, a lot of bearish traders have been saying “this reminds me of the dot-com bubble all over again”. Yes, valuations are above the long-term average. But valuations can remain above the long-term average for years! (By definition, that’s how an “average” is calculated.)
Valuations in public tech companies are much lower than they were at the top of he dot-com bubble. Tech’s P/E ratio is 65% lower than what it was at the peak of the dot-com era! This is because most of the wildly overvalued companies are private companies (e.g. Uber).
So no, the current bull market in U.S. equities is not going to end because “valuations are too high”. As long as this bull market continues, tech stocks will not collapse.
Oil will not collapse
With oil prices falling, some investors now expect oil to crater below $30. We disagree.
Historically, the cost of oil production has been a floor for oil prices. Here’s the cost of U.S. shale.
Oil prices constantly found support at $75 from 2011-2013 because the cost of U.S. shale was around $75. When shale production costs fell in 2014-2016, oil collapsed as well.
Here’s a monthly chart for WTI oil.
U.S. shale costs around $37 a barrel to produce in 2017. This cost is rising because acreage costs are rising. Hence, oil will at most fall to the mid-$30s, if oil’s bottom is not in already.
We’re not experts on oil because we only trade the S&P 500’s ETFs. However, we do know that oil crashes often don’t coincide with S&P 500 significant corrections. Hence, any future oil weakness will not impact the medium-long term outlook for the U.S. stock market.
*This doesn’t mean that a continued decline in oil can’t lead to a “small correction” in stocks.
Flash crash in gold and silver
Gold and silver flash crashed this morning within a matter of minutes. Someone dumped $2 billion of gold, so gold and silver cratered during a normally low-volume time. This was clearly the work of 1 trader/hedge fund who hit the SELL button and wanted to trigger stop losses. It didn’t work – stop losses weren’t triggered, and gold/silver found support very quickly.
Sometimes flash crashes lead to new lows, and sometimes flash crashes are the market’s bottom. How do you tell the difference between flash crashes that are followed by new lows and flash crashes that are followed by retests?
When the market has been falling for a while and then it flash crashes, it’s usually the bottom.
Here’s the S&P futures on Trump’s election.
When the market has been rallying for a while and then it flash crashes, the market usually makes a new low. Here’s the S&P in May 2010.
*We don’t have a good understanding of commodities because we don’t trade commodities. We only follow the precious metals markets with a passing interest.
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Nothing has changed since our June 23 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).
There was nothing particularly notable in the sectors today.
The energy sector was inline with the S&P 500 today. The energy sector underperformed oil today.
The finance sector was particularly strong today. XLF (finance ETF) outperformed the S&P. In addition, interest rates fell, which should have caused XLF to underperform the S&P.
The tech sector underperformed the S&P today.