The stock market’s strong gains over the past few weeks may have convinced some sidelined investors to finally get into the stock market.
Clearly the market sentiment has seen a dramatic shift. In my column published in August 2016 "What's Missing From This Bull Market?" I focused on the fact that throughout the bull market there had not been a period of investor euphoria.
This goes back to the famous quote from legendary investor John Templeton that bull markets "die on euphoria." The Dow’s 300 point gain Thursday suggests investor euphoria is building.
It should be no surprise that the forecasts from the major Wall Street strategists have seen a major turn from a year ago. Seasoned investors realize that these forecasts often go through dramatic changes during the year.
In 2016 the average forecast was 5% below where the S&P 500 ended the year. It looks as though they are going to do even worse in 2017 as the average S&P 500 forecast from the start of the year was for it to close at 2359. In fact several were looking for the S&P 500 to close lower in 2017.
Last summer Goldman Sachs was sticking with their year-end target at 2300 even though the S&P 500 was already trading above 2400. In July some of the other Wall Street strategists started to raise their forecasts. (Does An S&P Target Of 2700 Make You Nervous?)
Every year I caution investors not to use the Wall Street strategists to guide their investments. The data from the recent Bloomberg article also suggests that following their price forecasts would be a mistake. Since 1999 they have never predicted a down year.
In fact listening to their bullish calls during 2000-2002 would have resulted in a 50% loss. For 2018 the average a year-end target for the S&P 500 is 2800. The current high forecast is 2950 but expect this to change in early 2018.
Frankly these forecasts do not play any role in my outlook and I often use them as a contrary indicator. In August 2016 I commented that "The new high in the major averages and leading action of the advance/decline lines has still not convinced every one of the positive market outlook as Goldman Sachs advised their clients on August 1st to "avoid all stocks for the next three months".
I monitor the A/D lines on a daily, weekly and monthly basis to determine the short, intermediate and long term market trend. As long as the monthly analysis is positive then Viper ETF investors should be 50-70% invested in stocks. When negative weekly signals occur then investors are encouraged to take some profits and rebuy lower.
In a bear market cash equivalents and inverse ETFs are favored.
This chart of the NYSE Composite covers the stock market bottom in 2003 as the monthly NYSE advance/decline line turned strongly positive in April 2003, line 1, as it moved well above its WMA. The weekly A/D line had generated a positive signal in the middle of March.
The monthly NYSE A/D line continued to make new highs in 2004, 2005, 2006 and 2007 reaching its highest level in May 2007, line 2. The NYSE Composite made a new high in both June and July but the A/D line did not. The stock market corrected sharply from the July high to the mid-August low.
As the NYSE Composite, SPDR Dow Industrials (DIA), Spyder Trust (SPY) and PowerShares QQQ Trust (QQQ) were making new highs in October 2007 (line 3) the monthly NYSE A/D line was forming lower highs, line a.
The bearish divergence is typical of a change in the stock market’s major trend. By February 2008 the A/D line was below it flattening WMA.
The monthly NYSE A/D line stayed below its WMA through the stock market’s major decline in 2008 and did not turn positive until May 2009 (line 4). The weekly A/D line turned positive in April six weeks before the monthly A/D line analysis.
Since the spring of 2009 my stock market outlook has remained positive as the monthly analysis of the advance/decline lines have not formed any divergence as it did in 2007.
My outlook for the economy based on a series of economic indicators that I discuss weekly have never indicated that we were dropping back into a recession. Many fundamental analysts in 2010 and 2011 feared that a recession was inevitable.
The monthly A/D line stayed above its WMA from April 2009 until September 2015. This was the start of a sideways period (point a) as investors were waiting for new buying opportunities. It turned positive in March of 2016 as the monthly A/D line made a new high signaling that the bull market had resumed.
The trading low occurred in February 2016 as there were a number of technical and sentiment readings (Is There Blood in the Streets Yet?) that were consistent with a market bottom. Only 19.2% of individual investors were bullish then according to AAII.
Since the spring of 2016 the monthly A/D line has stayed well above its WMA and has not formed any divergences. Though there may be a sharp correction in the first half of 2018 there are no early warning signs of a bear market on the horizon.
As I have pointed out many times asking Wall Street strategists to come up with year-end targets is a foolish exercise in my opinion. Using technical methods I can come up with quarterly support and resistance levels or chart targets based on a trading range. It is clear after 35 years of analysis that the A/D lines can change significantly during the year.
In terms of price targets I only discuss price targets that are based on the charts or technical analysis. With the major averages making new highs one needs to use other methods to determine upside targets.
Two my favorite technical methods for determining future price levels are the starc bands and quarterly pivot point analysis. The formulas are quite different but often key turning points are identified when these two methods agree on the key resistance or support levels.
The Nasdaq Composite was making new highs each week in the last quarter of 2000. The quarterly pivot price levels are based on the prior quarter’s high, low and close. The price ranges for the 4th quarter of 1999 are on the chart. Using these numbers the quarterly R2 resistance level was 5055. The actual high in March of 2000 was 5132.
The monthly starc+ bands were easily exceeded from December 1999 through March 2000. In fact the monthly 3xATR starc+ band was also exceeded which was a sign that the Nasdaq Composite was in a high risk buy area. The weekly starc+ band was also exceeded the week it finally made its high.
For December 2017 the initial monthly pivot resistance is at $268.83 while the starc+ band for the Spyder Trust (SPY) is at $270.02. Based on the preliminary data (through November 30th) for the 4th quarter the tentative quarterly pivot resistance level is at $269.74 and $275.27 for the first quarter of 2018. As we get closer to the end of the quarter the pivot levels will become clearer.
The trading on Friday was been wild as a few hours before the close the S&P 500 is down 8 points but has had a 45 point range as stocks plunged when the plea deal for Michael Flynn was announced. I will publish a technical review of the week’s action on Saturday afternoon.
The quarterly pivot, starc band and A/D analysis are all a regular feature of both the Viper ETF Report and the Viper Hot Stocks Report. Each service is only $34.95 per month.
