*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
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Stock index & news
Short term bearish patterns.
Historically, the week after Options Expiration for June (aka this week) has been the weakest week of the year. The S&P closed higher only 3 times since 2000 during such a week. Factors such as this sound bearish on paper, but we ignore them.
- If the S&P closes even just 1 point below it’s prior week’s low, it counts as “the S&P fell this week”. This isn’t even very useful for traders.
- This is a very short term indicator. We don’t trade short term.
- This pattern has only worked since 2000. If you expand the data beyond 2000, this pattern isn’t that valid.
The S&P surged on Monday. When the S&P closed higher on Monday than the previous Friday, the rest of the week was negative the last 9 times since 1999, averaging -1.6%.
The S&P closed at 2433 last week.
We don’t use “high probability” short term patterns when making investment decisions. They’re much less valid than high probability medium-long term patterns. Patterns that occur for fundamental reasons are hard to be broken, while random patterns like this can easily be broken. They work until they stop working, and you have no idea when they’ll stop working.
Today’s S&P 500 decline had little to do with oil
Some traders are saying that “the S&P fell today because oil fell”. This isn’t entirely true. Yes, both the S&P and oil fell today. But if you look at the intraday charts, their declines don’t match up!
- Oil fell from 5am – 10am. During this time, the S&P futures only fell a little bit.
- Oil made a small bounce from 10am – 4pm. During this time, the S&P tanked.
Here’s the S&P’s hourly bar chart.
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Here’s WTI oil’s hourly bar chart.
The global economy is improving.
Last weekend, we wrote a post titled “The global economy is improving. It’s a bull market in stocks everywhere“. We looked at the economic data. The major global economies (U.S., China, Germany, France, Canada, etc) are all experiencing decent macro improvement.
Yesterday Goldman CEO Lloyd Blankfein also stated that the global economy is improving. He said that based on statistics, the U.S. economy is a lot better than what many people think. Obviously, the economy hasn’t fully recovered from the 2008 crisis. Some economic data series are still significantly below their 2007 highs. But the U.S. and foreign economies are on the right path. It’s the trend that counts.
The market doesn’t care about Trump’s policies
Senate majority leader Mitch McConnell just announced that a draft version of Obamacare repeal/replace will appear next Thursday. If everything goes as plans, the he wants to put the bill to a vote on Thursday/Friday.
McConnell doesn’t have the votes right now to pass this bill in the Senate. However, McConnell is no Paul Ryan. McConnell is an old hand at wiping up votes. Even many Democrats don’t think they can stop McConnell.
*Obamacare repeal/replace is essential to tax reform. In order to pay for tax cuts, Trump needs to cut healthcare spending.
Notice how the market did not go up on this news. As we’ve been saying over the past few months, the market doesn’t care about Trump’s policies. The stock market is going up in the medium-long term with or without Trump because
- the U.S. economy continues to improve
- corporate earnings are growing decently (see why we think Q2 2017 earnings season will be strong).
Nothing has changed since our June 19 bottom line.
- Our model says that this is a big rally in a bull market. There is no significant correction on the horizon.
- Despite our model’s bullishness, we’re sitting on 100% cash. By the end of June 2017, the current “small rally” will be longer than 96% of all historical small rallies.
- 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 abnormal on the S&P’s sectors today.
The energy sector fell the most today because oil tanked.
Oil has more than retested its May 5 flash-crash low. We think oil’s bottom is either already in, or is very close $40-$43. We don’t think oil will fall below $40.
*We don’t trade oil, so our outlook on oil isn’t very useful. Please ignore this. We focus on the U.S. stock market and S&P 500.
Here’s XLE (energy ETF).
The financial sector fell today because interest rates fell. Interest rates fell because oil fell. (Oil impacts inflation, which impacts interest rates).
Here’s XLF (finance ETF).
Here’s the 10 year Treasury yield.
As you can see, the finance sector is stronger than interest rates. Although interest rates have fallen, the year-over-year change in interest rates has not fallen. Overall, the 10 year yield is still supported on its 38.2% retracement.
The tech sector’s decline today was inline with the S&P’s decline. Nothing abnormal.