*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 throughout the day. Last updated 4 pm.
Stock index & news
- Volatility is back.
- Comparing the stock market today to 1995 and 2013.
- The global economy is growing nicely. This is still a bull market.
- A look at the S&P’s sectors during this downturn. (Scroll down below “Bottom Line”)
Volatility is back
VIX was really interesting today. When the S&P fell 38 points from 9:30 am to 1:30 pm, VIX soared from 9.7 to 15. Then when the S&P bounced and retraced a mere 38.2% of its decline, VIX completely collapsed.
We’re still not sure if this is the “small correction” that we’ve been looking for mid-May.
If the S&P falls again tomorrow (a Friday), there’s a >50% chance that it will crater next Monday. This is an interesting historical pattern that we’ve noticed, and there’s a logical reason for it.
When the stock market falls on a Thursday and Friday, it tends to crater the following Monday. Investors have some time to think about the market on the weekend, and everyone rushes for the exit gates on Monday.
Several significant corrections have played out this way.
Here’s August 24, 2015.
The crash of 1987 played out this way as well. The S&P started to fall on Thursday (October 15) and Friday (October 16). It CRASHED on Monday (October 19).
Our medium-long term model does not foresee a significant correction. So if the S&P falls tomorrow and craters on Monday, the decline will be a “small correction”. If the S&P is down 6% by Monday, we’ll shift from 100% cash to 100% long UPRO (3x S&P ETF).
Is today more like 1995 or 2013?
A lot of recent studies point to the same conclusion: the probability of a small-correction in early-July 2017 is high. During these kinds of corrections, the market often gets crushed for a few consecutive days and then bottoms. The small correction is merely profit taking.
However, the 1995 case always rendered these studies invalid. The U.S. stock market should have made a small correction in mid-late 1995 just like it did in 2013. It didn’t. The stock market soared throughout all of 1995. Why was 1995 so fierce?
For investors who are old enough to remember, Netscape IPO’ed on August 9, 1995. Even though Mozilla had gone public 2 years earlier in 1993, it was Netscape’s IPO that really kicked off the internet boom. Netscape’s stock nearly tripled on its IPO date.
So while the S&P should have made a small correction in August-September 1995, a “big new industry” called the internet sustained investors bullishness and prevented a small correction from happening. This was the beginning of the “new economy” story.
So the question comes down to this. Will 2017 be like 1995 (no small correction) or like 2013 (i.e. 1 small correction during the middle of the year)?
There are arguments for both sides, and the odds are 50-50. In other words, we don’t know.
- Velocity has become more intense in the modern day markets. Nowadays, the stock market goes up and down in more of a straight line. Pullbacks during rallies are rarer, and bounces during corrections are rarer. This supports the 1995 case.
- The stock market’s “buy the dip” mentality is very strong right now. The S&P fell 20 points on Tuesday, bullish investors stepped in, and the S&P surged 30 points on Wednesday. This supports the 1995 case.
- There are no “big new industries” like the internet that can sustain investors’ bullish belief. There’s no big new bullish story for investors to buy into. This supports the 2013 case.
- By the end of August 2017, the current “small rally” will have lasted longer than that of 1995. By the end of October 2017, this will be the longest “small rally” in history. This supports the idea that the S&P will make a correction sometime in 2017.
No matter what happens, the bottom line is simple. Our medium-long term model does not foresee a significant correction, so a “small correction” will not turn into a “significant correction”. The optimal decision in terms of long term investment performance is to ignore all potential small corrections and follow our medium-long term model.
The global economy is still growing at a decent pace.
Global exports continue to rise since early-2016. This fits with our previous post, which stated that the global economy continues to improve. The risk of a Trump-driven trade war is gone.
Nothing has changed since our our June 28 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).
Here’s an in depth look at the S&P’s main sectors since the tech sector topped on June 9. (The S&P is down a mere 1.9% because it topped on June 19).
Tech (24.68% of the S&P)
Tech has led the S&P’s decline. Tech is down 5.6%. Here’s XLK (tech ETF).
Finance (14.36% of the S&P)
While tech has been rising, finance has outperformed the S&P. This is why the S&P hasn’t fallen a lot. (Tech is the largest sector while finance is the third largest sector). The finance sector is up 2.7% since June 9. Here’s XLF (finance ETF).
Finance has been outperforming because interest rates have been soaring. (Highest interest rates = higher banks’ profits).
Healthcare (14.55% of the S&P)
Healthcare has also offset tech’s decline. The healthcare sector is up 5.2% since June 9.
The consumer discretionary sector has fallen since early-June because there are many tech stocks (e.g. Amazon, Netflix) in the consumer discretionary sector. Here’s XLY (consumer discretionary ETF), which is down 2.7% since June 9.
The industrial sector has been flat since June 9.
Here’s XLI (industrials ETF).