*These are our short term thoughts on the market. We invest purely based on our medium-long term model. We’re looking at how the market is reacts to news, earnings, and other fundamental themes related to the key individual sectors.
The S&P 500 started to rally today from the good Employment Report. Since the beginning of 2017, every jobs report has either pushed the S&P higher in the next few days or caused it to go flat. In no case did it go down.
- Decent report on January 6: S&P remained flat over next 2 weeks.
- Good report on February 3: S&P started to rally strongly.
- Strong report on March 10: S&P went up for 5 more days.
- Weak report on April 7: S&P went flat over next few days.
So if this pattern holds up, expect the S&P to be flat or go up in next few days. The probability of the S&P going up is higher, which means that it will probably make a new all-time high.
Today’s main rally started from 1:30 pm, when Fed Chairman Yellen spoke at Brown University about glass ceilings that women face in the workforce. Is “the S&P going up on any random excuse” a bullish sign? (The whole “gender” argument has no real meaning for the S&P.)
Meanwhile, other Fed speakers maintained the hawkish tone that the Fed should start to cut its balance sheet in the 2nd half of 2017. The S&P still went up. Bullish.
We focus on energy because it is a highly volatile sector. We focus on finance and tech because these are the 2 biggest sectors.
Oil prices are falling again. Oil really started to crash below $48 since May 2. Oil has been a drag, but the S&P’s reaction has been bullish.
- When XLE (energy sector ETF) went down from April 27 to May 4, the S&P was completely flat. The S&P did not fall.
- When XLE bounced today, the S&P went up too.
Is oil still playing the “global economy is good” theme? Today’s oil bounce was a technical bounce, but perhaps it was also replaying the global reflation theme. The global reflation theme ended in mid-December 2016, even though the S&P has gone up since then. XLE has fallen significantly while the S&P has gone up.
You need to be careful about oil’s low on May 4. Oil made a mini-crash at 11 pm on May 4. These mini-crashes at night tend to be engineered by an individual trader/firm, and the crash tends to be at least retested.
But even if oil does retest the mini-crash low of $43.77, its low is very close. XLE has given up its entire post-Trump election rally.
If oil remains at $45 throughout this quarter, the energy sector’s earnings in Q2 2017 will be weak. Oil prices will have fallen $5 year-over-year, thereby hurting energy profits. Almost half of the increase in S&P 500 earnings growth in Q1 2017 was attributed to the energy sector.
While the S&P has almost reclaimed its old high in early-March 2017, XLF (finance sector ETF) is still below its early-March 2017 high.
This is primarily because interest rates have been down significantly since then. The 1st chart is XLF, and the 2nd chart is the 10 year Treasury yield. XLF has a tight correlation to interest rates.
Jeff Gundlach thinks that Treasury rates will go up in the next few months as the Fed hikes rates. This should be bullish for the finance sector.
The finance sector had a terrible reaction to Q1 2017 earnings season (released in April). Bank stocks did not go up at all despite good earnings reports! However, perhaps the energy and finance sectors do not care about their earnings reports because investors can already predict future earnings based on the price of oil and interest rates, respectively.
So if the energy and finance sectors have been dragging the S&P 500 down, what has been dragging the S&P up? Tech. Tech sector ETF XLK has been continuously making new highs since early-March 2017. It had a very bullish reaction to this earnings season, in which many tech companies like Amazon and Facebook beat expectations.
Below is XLK’s chart.
Short term prediction
Our model says that the U.S. stock market is still in a rally within a bull market. Hence, we are 100% long UPRO (the 3x ETF for the S&P 500).
All our short term observations point to the S&P making new highs in the next few days/weeks. The energy sector’s downside is limited, the finance sector should go up as interest rates rise a little, and tech is doing well.
Perhaps after that the S&P will make a small correction.
*Our short term observations do not have a high historical accuracy rate.