*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.
Stock index & newsSome people were shocked by today’s weak New Home Sales. It’s interesting that all 4 housing indicators this month were weaker than expected (New Home Sales, Housing Starts, Pending Sales, Existing Home Sales). This temporary weakness matches the fact that Citigroup’s Economic Surprise Index has been deteriorating. However, overall housing is still improving. Focus on the overall trend and not the month-to-month fluctuations. Housing is still a medium-long term bullish factor for the U.S. stock market. Here’s the New Home Sales chart. There is a new bearish factor We have been looking for bearish factors that will trigger a small 6%+ correction in the S&P 500. Aside from the fact that this is one of the longest small rallies in history, we only had 1 bearish factor thus far:
- Rising oil production will hurt oil prices. Falling oil prices will put downwards pressure on the energy sector, which will hurt stocks.
If Trump is crystal clean, why does he need to beef up his legal defence and prepare for possible impeachment?News update: Trump is close to picking outside legal counsel for the ongoing Trump-Russia investigation. In addition, former CIA director John Brennan said that he was concerned about “possible interactions” between members of the Trump campaign and Russia’s intelligence agencies. Brennan doesn’t have any solid proof, but he is concerned. We think that Trump has something to hide. However, we don’t think that “something” is enough to prove collusion, impeach Trump, and force him to resign. Perhaps that “something” has to do with Trump’s business dealings with Russia. Trump is the first president not to release his tax returns. *This is all random speculation. The continuing cloud that hangs over this administration can be the trigger for a small 6%+ correction. We don’t think this cloud will cause a significant correction. The S&P’s reaction to Trump-news right now is completely normal. The S&P always lags the bad news and fundamentals. The news/fundamentals will deteriorate first while the S&P ignore the news and continues to rise. Then the S&P will fall when the bad news cannot be ignore. That has been the pattern historically.
SectorsThere was nothing notable going on in the individual sectors today. Energy Oil went up a little today, so the energy sector ETF XLE went up a little. Finance The finance sector was the leader today because interest rates went up. The year-over-year change in interest rates impacts banks’ profit margins. However, you can see that interest rates are still at the low end of their range. Here’s the 10 year Treasury yield chart. Information technology The tech sector performed in line with the S&P 500 today.
Bottom lineWho knows when the small correction will begin. We now have 1 additional short-medium term bearish factor.
- This is still one of the longest stock market rallies without a small correction in history.
- Our model does not foresee a significant correction or a bear market. Based on our discretionary outlook, we agree with our model.
- Oil is still a risk to the S&P 500.
- Trump is a new short-medium term risk to the U.S. stock market. This risk is enough to cause a small correction but is not big enough to cause a significant correction. But if Trump is impeached and forced to resign, you should expect a significant correction.