Thoughts

1. Sentiment: a short term bearish sign for the stock market.
2. Perspective matters. The Fed is reducing assets at a very slow pace. Not enough to hurt the stock market and economy.
3. High yield spreads continue to narrow. A medium-long term bullish sign for the stock market.
4. The stock market will probably rally a few more quarters because Compensation of Employees + Private Nonresidential Fixed Investment has yet to surge.

1 am: Sentiment: a short term bearish sign for the stock market.

Investors Intelligence is another popular sentiment survey. This sentiment indicator has gone up 4 weeks in a row, which is a small short term bearish sign for the U.S. stock market.

The 1 week forward returns when this happens are more bearish than random.

*I focus on the medium-long term instead of the short term.

1 am: Perspective matters. The Fed is reducing assets at a very slow pace. Not enough to hurt the stock market and economy.

Bears like to say that the Fed’s balance sheet reduction will kill the equities bull market. As always, perspective matters. The Fed is reducing its balance sheet at an extremely slow pace.

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The Fed’s monetary tightening is not significant enough to kill the equities bull market right now.

And you’ve probably seen charts where rate hikes “always” lead to stock market declines.

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While that is true, TIMING is of the essence. Being early = being late = being wrong. The stock market tends to go up while the Fed is hiking rates, and fall after the Fed stops hiking (study and study). So avoiding the stock market right now just because “the Fed is hiking rates” is an investment/trading thesis without analysis.

Yes, the stock market will “eventually” crash. But “when” is the more important question.

1 am: High yield spreads continue to narrow. A medium-long term bullish sign for the stock market.

High yield spreads continue to make new lows even though the stock market is still below its January 2018 highs.

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This is a medium-long term bullish sign for the stock market and suggests that January 2018 wasn’t the stock market’s top. Bond market participants are smarter than stock market participants, which is why the bond market is a leading indicator for the stock market. Historically, high yield spreads widen before a bull market tops.

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1 am: The stock market will probably rally a few more quarters because Compensation of Employees + Private Nonresidential Fixed Investment has yet to surge.

Compensation of Employees + Private Nonresidential Fixed Investment tends to surge for a few quarters before bull markets and economic expansions end. That has yet to happen in the current bull market, which suggests that the bull market still has some room to run.

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Outlook

Here’s what I think will happen based on my discretionary outlook.

1. 2018 will trend higher but will also be a choppy year.
2. The S&P 500 has approximately 1-2 years left in this bull market.