*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
- Why the stock market fell today.
- Tech has been underperforming the broad stock market since June 9.
- There’s a simple reason why “U.S. economic data vs. expectations” has been deteriorating.
Why the U.S. stock market fell today
The media attributed the S&P 500’s decline this afternoon to:
- The Senate has decided to delay the healthcare vote until after July 4.
- Yellen spoke today at 1 p.m. in London.
We disagree. These 2 triggers were merely excuses for the S&P’s selloff. The S&P started to fall at 12 p.m.. Yellen started to speak at 1 p.m., and the Senate announced its delay at 1:50 p.m. The timing doesn’t even match up!
The market is selling off because this is one of the longest “small rallies” in history. The current “small rally” has lasted 255 trading days (96 percentile). Only 3 historical small rallies have lasted longer:
- October 5, 1992 – January 31, 1994 (335 trading days). That ended with a “significant correction” that our medium-long term model was able to predict.
- December 9, 1994 – February 13, 1996 (297 trading days). That ended with a “small correction” that occurred for no fundamental reasons. The market made a “small correction” simply because the “small rally” was too aged. It didn’t fall on any specific bearish news.
- November 16, 1988 – January 3, 1990 (284 trading days). This ended with a “small correction”.
So perhaps the S&P will make a new high right now, or perhaps the “small correction” has already begun. Either way, we’re sitting on 100% cash and waiting to buy UPRO (3x S&P ETF) on the next 6%+ “small correction”. When a “small rally” becomes this aged, a “small correction” can begin on any excuse/trigger.
If the S&P 500 makes a “small correction” right now, that’ll be a perfect setup for a mid-late July rally on Q2 2017 earnings season. When the market falls and becomes short-term oversold, it usually goes up on earnings season. Q2 2017 earnings season will probably beat analysts’ expectations.
Patience. That’s how the big money is made in investing/trading.
XLK has underperformed the S&P 500
Since June 9, the tech sector has underperformed the S&P 500. This is on the heels of a multi-month rally in stocks that was led by the tech sector. The first chart is XLK (tech ETF), and the second chart is the S&P 500.
Some investors are afraid that this is a bearish sign for the S&P. They think “tech was a leading sector, and now that it’s lagging (no new highs), the S&P will fall as well”. We agree that the S&P can make a 6%+ small correction at any time because this is one of the longest “small rallies” in history.
However, we disagree with the reason for any potential correction. Historically, this “leading-lagging” correlation hasn’t been very useful.
- Sometimes a sector that lags will soon pick up the slack and join the rally. That’s called sector rotation.
- Sometimes a lagging sector will continue to lag. That’s a bearish sign.
There’s no consistent pattern here, and it’s impossible to know which scenario the market is playing right now.
The Citigroup Economic Surprise Index cannot deteriorate much more
Since the Trump election, analysts’ expectations for future economic growth have soared. So with the U.S. economy growing at the same modest level, it comes as no surprise that the economic data is “missing expectations”. Analysts simply set expectations too high. Overall, the economy is still growing decently, and the recent weakness is transitory.
*The Citigroup Economic Surprise Index doesn’t measure the U.S. economy’s actual performance. It merely measures performance vs. expectations. These are 2 very different things.
Yes, the Economic Surprise Index might deteriorate a little more. But it won’t fall a whole lot more. It’s currently at -78, and historically it didn’t fall below -100.
Nothing has changed since our June 26 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).
Today’s S&P 500 decline was led by the tech sector while the energy and finance sectors outperformed (because oil and interest rates soared).
*Oil and interest rates impact energy/finance companies’ profits.
First chart is XLE (energy ETF), second chart is WTI oil.
First chart is XLF (finance ETF), second chart is the 10 year Treasury yield. The 10 year yield SOARED today.