Stocks Outlook - Wednesday, Sept. 19

Thoughts

#Perspective Wednesday: the stock market holds its break support.

Fund managers are extremely bearish. This is a bullish contrarian sign.

An increasing deficit doesn’t mean that yields will soar and crush the stock market.

China’s Plunge Protection Team is stepping in to save its stock market.

Once China’s stock market bottoms, 1 more year before the U.S. stock market tops?

Medium and long term U.S. stock market traders shouldn’t worry too much about the trade war.

1 am: the stock market holds its break support.

Some perspective is important when looking at the U.S. stock market.

Despite the ongoing trade war, the S&P 500 has merely turned its January 2018 from resistance into support.

1 am: Fund managers are extremely bearish. This is a bullish contrarian sign.

Bank of America’s latest fund manager demonstrates that fund managers are the most pessimistic on the global economy since 2011.

On the surface, this seems bearish for U.S. stocks and the U.S. economy. But considering that only 10% of active fund managers outperform the S&P 500, this is actually a bullish sign for U.S. stocks. Active fund managers are mostly a contrarian indicator.

As you can see in the above chart, this level of bearishness DURING AN ECONOMIC EXPANSION (e.g. 1998, 2004-2006, 2011, 2016) marks a medium term buying opportunity. And with U.S. economic growth at 3-4%, a recession over the next 6-12 months is highly unlikely.

1 am: An increasing deficit doesn’t mean that yields will soar and crush the stock market.

As you probably know, the U.S. federal debt continues to rise (partially due to Trump’s tax cuts). Some people automatically assume that a rising federal debt means that U.S. interest rates will soar (because supply of Treasuries increases). This is an oversimplification.

Yields won’t soar if demand keeps pace with supply. That’s just how markets work. And when interest rates rise, demand increases as well (more buyers are attracted to higher rates).