Stocks Outlook - Tuesday, Sept. 18

Thoughts

Volatility will increase

The stock market tends to swing sideways for a few weeks after each rate hike.

Ignore the divergence between the U.S. stock market and Chinese stock market.

Buybacks continue to put a floor under the stock market. Stocks with larger buybacks are going up more.

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

1 am: Volatility will increase

The stock market’s volatility has been low over the past 3 months. The S&P 500 has gone 74 consecutive trading days without a >1% gain.

Here’s what happens next to the S&P 500.

As you can see, these long streaks of very subdued volatility aren’t consistently bearish for the stock market. Low volatility isn’t necessarily bearish for the stock market. It merely means that sooner or later volatility will rise.

1 am: The stock market tends to swing sideways for a few weeks after each rate hike.

The Fed will most likely hike interest rates this month. Throughout the current rate hike cycle, the S&P 500 has usually swung sideways over the next few weeks after a Fed rate hike.

1 am: Ignore the divergence between the U.S. stock market and Chinese stock market.

As you probably know, the U.S. stock market continues to go up while the Chinese stock market has tanked on Trump’s trade war.

Some people are concerned that a falling Chinese stock market will bring the U.S. stock market down, just like in 2015.

This is recency bias. For starters, the Chinese stock market is less than 1/5 the size of the U.S. stock market. Moreover, the Chinese stock market had been falling from 2011-2015 while the U.S. stock market went up. That was a 4-5 year “bearish divergence”.

Historically, it is completely normal for the U.S. stock market to go up while the Chinese stock market falls.

Here’s the S&P 500 : Chinese stock market ratio. There’s nothing bearish about the U.S. stock market significantly outperforming the Chinese stock market.