*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 reacts to news, earnings, and other fundamental themes related to the key individual sectors.
Once again, the S&P 500 made a marginal new all-time high today. And once again, these new highs were not sustained.
Some investors think that this is a sign of weakness. Not true. It is neither a bullish sign nor a bearish sign. It is an irrelevant sign. A similar pattern happened very often in 2013. Every day, the S&P would open higher and then fall for the rest of the day. But overall, the S&P kept going up. The bears got skinned in 2013.
Several traders have pointed out that the stock market’s breadth is weak. This is true. Most of the S&P’s gains over the past 3 months came from FAANG (Facebook, Amazon, Apple, Netflix, Google). While tech stocks have soared, many other sectors have lagged.
But remember that breadth is a terrible indicator. Breadth was “weak” in 2013-2014 when the stock market soared.
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Housing Starts and Industrial Production were released today. Housing Starts missed expectations by a lot while Industrial Production beat expectations by a lot. Some investors are worried that growth in Housing Starts is slowing down. This is not a concern.
Investors should be asking “is Housing Starts growing?” and not “how much is Housing Starts growing?” Overall, the trend still points higher for housing. Today’s dip is merely a normal fluctuation. See the following chart.
And if you look deeper into the data, you’ll know why today’s housing report was not bad:
Housing starts is split into 2 parts: single-family (i.e. house) and multi-family (i.e. apartment). At this stage of the economic expansion, single-family construction should start to rise and multi-family construction should stagnate. Today’s decline was due to a big decline in multi-family and not single-family. So the housing expansion will continue on the backs of single-family growth.
As millennials settle down and start families, demographics favor a shift from single-family to multi-family. This is normal.
Once again, everything is tied to oil. The S&P closed flat because oil put downwards pressure on the energy sector. After a few days of big rallies, crude oil’s temporary pause today is to be expected. However, strong momentum in a market like oil doesn’t just die. After today’s pause, oil will probably go higher in the short term.
We think that the S&P will begin its small correction when oil tops.
We talked to some excellent oil traders who think oil will go up to $51 and then reverse downwards. If they are correct, then the S&P-oil’s current correlation means that the S&P should push to marginal new highs (i.e. 2410-2420).
Who knows. We are not in the business of guessing day-to-day changes in the stock market.
As is expected, interest rates and oil have a strong day-to-day correlation right now. The 10 year Treasury yield fell because oil fell a little. There is a strong over-all correlation between interest rates and the finance sector.
Since late-April, the finance sector ETF XLE has been flat because interest rates have been flat.
Once again, the tech sector went up the most today. This is to be expected. In a big rally within a bull market, tech usually outperforms. There is nothing “bearish about this” (contrary to what some perma-bears think).
Overall, everything is within expectations.
- Like our model predicted, this is still a big rally in a bull market.
- The economy is perfectly normal and is acting in accordance to standard patterns in an economic expansion.
- Who knows when the next small correction will begin. But short-medium term risks are high right now. The S&P’s current small rally is in the 91 percentile of small rallies.
- The S&P will start to go down when oil starts to go down again.
We remain in cash and will buy UPRO (3x ETF for the S&P 500) when the S&P falls 6%.