Market Forecast

  • 08 Aug
    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    Since the beginning of July, the market has shown quite a bit of bullish momentum. As of this writing, the S&P 500 (SPY) has rallied more than 150 points from a pivot low in late June in the 2,700 area – a total gain in a little over a month of 9%. The index is now poised to match, and quite possibly exceed the highs it reached in late January. For most technical traders, a new high marks a break above resistance that should give the market momentum to keep pushing even higher. If you’re not the type of person, however to simply “leap before you look,” then like me, you want to try to figure out how much room is left.

    How much upside remains in the market isn’t an easy question to answer, simply because nobody can make anything more than a semi-educated guess about future events – or the way the investing world will interpret them. The same technical traders who look for new all-time highs to extend trends even further also like to use historical price action to come up with estimates. Economists and fundamental investors try to use geopolitical and macroeconomic data and events to identify keys and trends. I hesitate to say that any one approach is better than another. Instead, I like to consider a combination of a couple of different technical techniques, along with economic and, yes, even geopolitical conditions to try to come to my own opinion.

    I spent some time this morning going over some of that data, and here’s what my early conclusions are. Keep in mind, these are just a few of my own best attempts to make a semi-educated guess, so you can take it or leave it as you wish.



    Some Fuzzy Math

    I’ll start by giving you a look at a technical chart of the S&P 500.

     

    There are a couple of elements of this chart that I think are useful right now. The first is the Relative Strength (RSI) indicator shown in the lower portion of the chart. RSI is a sentiment and momentum indicator that oscillates between upper and lower extremes to gauge a trend’s strength and give traders a way to estimate the likelihood the trend will continue or reverse. At the upper extremes (above 70), reversal risk to the downside is increased, while at the lower extremes (below 30), the opposite is true. The other element that comes into play about RSI is that stocks will often continue to follow their current trend even as RSI hovers near, or even beyond extreme levels. That reality is what makes RSI interesting to me right now. Even as the S&P 500 is pushing near to the all-time high it set in January of this year, RSI remains just a little below its uppermost extreme. It has also managed to oscillate within its upper and lower extremes since that high was reached in January, with its general pattern of highs and lows since April closely approximating the pattern of the index. That is a confirmation of the market’s trend over the last four months, and the fact that the indicator still hasn’t pierced its upper extreme band suggests there could be more room to run.

    At this point, it’s worth taking a moment to discuss a basic tenet of trend-based analysis. Trends tend to move in what I like to think of as stages. Typically speaking, most long-term trends can be broken into three different stages. Stage 1 is the earliest portion of a trend, when the market begins to reverse from an extreme or high or low. That’s the hardest stage to recognize, simply because it moves against the grain of the current longer trend, when most people will simply see that counter move as a minor correction or pullback within that trend. Stage 2 is the longest portion of a trend, and the area where the most money is likely to be made. It’s where the new trend is easiest to identify, and so more and more investors jump on board in that direction, making it easier and simpler to maintain. Stage 3 is the latest stage of the trend, and what I like of as the “last gasp” stage of that long-term trend. There is often still quite a bit of room to move along the trend in this stage, and so this stage can still yield very profitable results; but it also means that reversal risk is greatly heightened during this stage.



    The challenge about the stages of a trend is predicting how long any given stage will last. Stage 2 can last 4 to 5 years in many cases, while Stages 1 and 3 are usually considerably shorter. The problem is that word – usually. I’ve been saying the market is in Stage 3 of its long-term upward trend for more than two years, which is undoubtedly longer than that stage should last. I maintain that attitude, however, simply because I think it is smarter to estimate conservatively; plan for the best, but be prepared for the worst. That means that I want to recognize and take advantage of upside opportunity when it’s there, but be ready and positioned to react quickly and effectively when the market reverses back the other way.

    If you operate on the idea that the market is in Stage 3, any upside that remains should be somewhat limited. That is where the “291.78 Total Distance” estimate I highlighted on the chart comes into play. Some people will take the total distance of the last market correction to estimate how far the market’s new opportunity will be after a new high is reached. I think it’s reasonable to use the total distance as a reference point, but I prefer to think in somewhat more conservative terms.

    Another technical method of market analysis that I have learned to appreciate over the course of my years in the market is Fibonacci analysis. It’s pretty fascinating to see how market trends, and their swings from high to low correspond with Fibonacci mathematics. Those calculations can also be used to estimate a market’s extension of a trend. Here’s what we get if we apply the .618 Fibonacci ratio to the total distance of the market’s correction from January to April of this year:

    291.78 X .618 = 180.32

    We can add this number (roughly 62% of the total size of the correction) to the last market high to get an estimate of how much further the market could run if the resistance from that high is broken.

    2,872.87 + 180.32 = 3,052.87

    180.32 / 2,872.87 = 6.27% total upside

    Forecasting broad market upside of about 6% if the market makes a new high seems like a pretty conservative estimate; if it is even remotely close to correct, that should translate to some pretty healthy gains on individual stocks. How long that kind of a run will take is anybody’s guess. I decided to look back at the last two bull markets to gauge how long Stage 3 of their respective long-term trends lasted.



    The bull market that ran from 2002 to 2007 hit a high point in October 2007 before beginning its reversal; the “last gasp”, final stage of that five-year trend began in August, meaning that Stage 3 in that case covered about a two-month period of time. Prior to that, the March 2000 high that marked the end of the “dot-com boom” started its “last gasp” push in February of the same year. Saying the market could move about 6% in one to two months isn’t unreasonable given the increased level of volatility we’ve seen from the market this year; but I also think it’s useful to think about how long it has taken the market to recover from its latest correction (assuming, of course, that a new high is actually made). The bottom came in April, so a conservative estimate could suggest that it may take between 2 to 4 months. That certainly implies the market’s trend could last through the rest of the year, or possibly even longer since my estimate intentionally errs on the conservative side.

    There are some important elements from a fundamental and economic view that I think support the idea the market has some room and reason to run a little longer. Earnings continue to come in generally strong, and most economic reports (jobs, housing etc.) are also showing pretty broad-based strength. A healthy economy should generally lend itself well to continued strength in the stock market. While interest rates are rising, the Fed has maintained a conservative pace and degree of those increases, and the economy seems to following that lead pretty well. As they currently stand, interest rates remain historically low despite the increases we’ve seen so far. That is also a positive, bullish indicator.



    There are risks to my forecast. Frankly, many come from the geopolitical arena at this stage. Trade war concerns are still on everybody’s mind, and the Trump administration’s reimposition of economic sanctions on Iran could put a cap on oil supply that could drive oil prices near to their historical highs. While corporate earnings have yet to really show a negative impact from tariffs between the U.S. and its trading partners, more and more CEO’s are starting to cite tariffs as a risk. If that risk starts to manifest itself in an actual deterioration of revenues, and of earnings, the market can be expected to react negatively. Increased oil prices, at the extreme, could have the net effect of muting demand for a wide range of goods all over the globe. Real estate prices in many parts of the U.S. have also been showing some remarkable increases over the last year or so as well, while wage gains have generally been quite muted; at some point, those increases, along with increasing interest rates could very well put home ownership – a big indicator of broad economic strength – out of the reach of the average working person.

    Is there good upside left in the market? I think there is. I also think we have to be careful to factor risk into our evaluation and our investment decisions. Be conservative and selective about how you jump into a new opportunity, and plan ahead about how long you intend to stay or how much gain you want to chase. Put a plan in place to limit your downside risk if you’re proven wrong and the market turns against you, and limit the size of the new positions you take.


  • 25 Jun
    “Buy the Dip” is a terrific, time-proven bullish strategy – has its time passed?

    “Buy the Dip” is a terrific, time-proven bullish strategy – has its time passed?

    No matter whether we look at the market and economy with a short or long-term perspective, and no matter what method we usually use to make money in our investments, as investors we are all limited by our inability to see the future. Since we can’t see or know what’s going to happen, we’re left to do our best at making semi-educated guesses using imperfect information. That also means relying on historical data to make forward-looking decisions like what to do with our money. We assume that because a certain method, strategy, or technique worked under certain conditions in the past, it should work again now, or in the future when conditions appear similar.

    There are a lot of investing techniques and strategies out there, and a lot of the most popular ones use a really catchy turn of phrase so you can remember them easily. “The trend is your friend” is one that I learned early in my investing career to help me determine which direction, bullish or bearish, my trades should generally be taking. Another one that has been really popular for the last few years is “buy the dip.” This is one that worked out really well for short-term traders all the way through 2016 and 2017. Here’s what I mean. The chart below is for the SPY, which is an exchange-traded-fund (ETF) that tracks the movement of the &P 500 index.

     

    The green diagonal is a good reference for the market’s long-term trend line during the two-year period shown here. “Buy the dip” means that whenever the stock market experiences a short-term drop – how much really depends on the individual’s preference, and can be a percentage from the last high, a total number, or a visual reference such as the one I’m using here – it’s really an opportunity to buy in and ride the next wave higher. If you’re a short-term trader, using a trend line like the one I’ve drawn would have provided an excellent reference point. I’ve highlighted four difference points over the last two years where a drop to or near to the trend line provided a really good entry point for a bullish trade. While you can’t buy the index, you can trade options on it, or you can work with an ETF like the SPY to go long on the stock or to use call options at a lower cost than index options would carry. If you buy on these kinds of dips, you would hold for as long as the market is showing solid bullish momentum, and then sell when you see the next short-term dip. Taking that approach on any of these four entry points would have generated excellent profits.



    Another approach that really became popular during this period is what you’ve probably heard called “passive investing.” It also relies on the same kind of signals for an entry, but then suggests that since the market is going to experience the same kind of short-term ebbs and flows, all you really need to do is find the next entry point and then ride the next several waves higher. If you were fortunate enough to get in on the dip in July 2016, around $201 and then followed the passive investing mindset, by the end of 2017 you would have been looking at almost $70 per share in profit from the SPY. That’s a two-year return of almost 34%! It’s really no wonder that so many people gravitated to passive investing using ETFs or stock index mutual funds like the Vanguard 500 Index Fund during this time; it really seemed like the market was a no-brainer, can’t-miss kind of investment.

    The problem that underlies methods like passive investing, or even the normal “buy the dip” mentality is that most investors lose the discipline to pay attention to signals that the market is changing. It usually means they just assume the upward run will never end, and the latest drop is just another “dip” in the latest series of dips before it picks up again. That puts the average investor at big risk when the broad market experiences the kind of rare, “sea change” shifts that only come along once or twice a decade. The last economic cycle that ended in a recession in 2008 is a perfect example.

    As with the last chart, I’m using the green diagonal for the market’s long-term trend from late 2002 through the beginning of 2008. The blue circles highlight terrific “buy the dip” points that had a lot of people thinking the market was just going to keep going up forever. The red circle highlights a dip in the latter part of 2007 that by all appearances looked like just another dip in the longer trend, but really proved to be just the last desperate gasp of momentum the market had left. At the beginning of 2008, the SPY dropped below its long-term trend line and found a temporary bottom around $132 per share. That’s about a 9% drop from the entry around $145 that most “buy the dip” traders were taking in late 2007, and should have been a clear signal to exit the trade and cut your losses. If you didn’t recognize that signal, your loss could have been much, much bigger since the market didn’t find a bottom until early 2009, when the SPY was around $67 per share. That’s a drop of nearly 54% if you rode it all the way to bottom, and didn’t get reclaimed until late 2012. That’s the kind of loss, and extended, protracted recovery that most traders that love to “buy the dip” when the times are good can’t handle.



    One of the big keys to being successful with any investing strategy, no matter whether it works on a short-term basis or with a long-term perspective is really less about when you buy a stock than it is about when you sell. Smart “buy the dip” investors will usually sell when they see the market staging short-term weakness that could become a longer-term downward slide. That locks in their profits and opens up the opportunity to buy in again on that next dip, hopefully at a low point. Acting quickly on taking profits also would have the advantage of getting you out of the market before a “last gasp” rally turns into a market reversal.

    The danger remains, however that could buy a dip expecting just another upward thrust, but ultimately see the market reverse right after you got in. That’s why it’s also important to pay attention to trends and recognize that when the market drops below major, long-term trend lines, the risk of a “sea change” reversal is incrementally higher than normal. If you bought the last dip in late 2007, for example, it would have been much better to recognize the drop below $140 for what it was. Even if you didn’t get out until the market found a temporary support point around $132, an 8% loss on that trade would have been far easier to deal with than riding the SPY all the way down to $67 hoping for an eventual turnaround.



    Okay, now let’s take all of that and talk about what the market is doing now. As of this writing, the market is down about 3% from its last high about two weeks ago. Is that just another “dip” that investors should treat as a buying opportunity, or maybe something more serious. Let’s take a look.

    The green diagonal line is, once again our proxy for the market’s long-term trend, with the dotted blue line acting as visual reference for its short-term trend. “Buying the dip” would have been really profitable if you bought in April, and dips in the early part of May, and then again late that month would have also have yielded some decent short-term gains. Notice that the index has dropped below that short-term trend line as of today. If it turns back to the upside, that could be another good short-term signal, but it also should be taken as a warning sign that it’s time to be a little bit cautious. Are we looking for a major, “sea change” kind of reversal? Not yet; but it’s also true that the index is just a short distance – less than 5%, in fact – away from the long-term trend line. A drop below $260 per share in the SPY is exactly the kind of signal that “buying the dip” is going to put you at an increasing risk of being on the wrong side of the market, at exactly the wrong time.

    What if the market proves the naysayers wrong yet again? The problem with the long-term trend right now is that the market’s activity since late January has forced that trend to flatten out, meaning that it is losing momentum and strength. Short-term traders who recognize this reality won’t necessarily stop trading, but they will usually act even more quickly than normal to close out winning trades and lock in profits than they might be to let their winners run. The fact is that until the market moves past its all-time high, reached in late January when the SPY peaked at almost $287 per share, it’s hard to make any kind of substantive case for any kind of continued bullish rally that would extend this bull market past its current nine-year run and possibly into the next decade.


  • 25 Apr
    Here’s Why You Should Worry About What Happened In The Market Yesterday

    Here’s Why You Should Worry About What Happened In The Market Yesterday

    The thing with the stock market is that it gives you signals way ahead of time, but nobody wants to listen. The things I’ve been blabbering about over the past two years are the following:

    1. Higher interest rates will come just as the FED told us they would.
    2. Higher interest rates will squeeze valuations.
    3. Higher interest rates will slow down economic growth.
    4. Higher interest rates will slow down earnings growth.

    So, let’s start by discussing these.



    The 10-Year Treasury Passes 3%

    When the 10-year Treasury was below 3%, nobody seemed to care except a few crazy analysts like this scribe. However, when it crossed 3%, the market suddenly looked at what had been going on for nearly the last two years. More →

  • 23 Apr
    This Market Is Getting Crazy – Here’s How Buffett Says To Invest In It

    This Market Is Getting Crazy – Here’s How Buffett Says To Invest In It

    • We’ll discuss some news first, including commodity prices, chip guidance, and covenant ratios.
    • Then we’ll put things into perspective and see what an investor can do in this market.
    • I’ll give you a few tools that will make investing easy for you, if you can handle them.



    Introduction

    Last week, the stock market was positive for half of the week and then negative for the remainder. More →

  • 19 Apr
    Lithium Is Hot, But Here’s What You Need To Know Before Investing In The Trend

    Lithium Is Hot, But Here’s What You Need To Know Before Investing In The Trend

    • Is the current decline a lithium buying opportunity?
    • We’ll analyze the sector, and the key factors to watch in the industry.
    • I’ll use a bottom up approach and discuss the company Lithium Americas.



    Introduction

    We all know the story about lithium and the expected surge in demand coming from the electric vehicle boom. However, some stocks haven’t performed as many expected in the last few months, and I want to look at what’s going on to see whether it’s a buying opportunity or if we should still stay clear of lithium miners.

    Today, I’ll use a bottom up approach to discuss Lithium Americas (NYSE: LAC). By analyzing the company, we will see how it fits in the lithium environment and what we have to seek out when analyzing investments as there is a high likelihood that lithium will be the place to be over the next 10 years due to its lightness.  More →

  • 05 Apr
    We’re At the End Of The Current Economic Cycle – Get Ready For A Wild Ride

    We’re At the End Of The Current Economic Cycle – Get Ready For A Wild Ride

    Yesterday, we discussed what’s going on with stocks. One of the explanations is that the market is pricing in the end of the economic cycle. If that’s true, there is a lot more downside for stocks.

    Let’s see what the latest economic news is, how that fits the economic cycle, what the probability for a recession is, and what we should expect from stocks.



    Economic News

    The economic news is relatively good. Jobless claims have reached the lowest level in history. More →

  • 04 Apr
    This Is Why The Stock Market Is Crashing

    This Is Why The Stock Market Is Crashing

    • I’ll discuss the short-term perspective on what is going on, and the long term.



    Introduction

    I’ve been writing about the risk the stock market carries forever now. However, nothing was really happening until the last two months when volatility spiked and stocks actually went below their all-time highs. More →

  • 02 Apr
    What You Need To Know About Investing In Gold In 2018

    What You Need To Know About Investing In Gold In 2018

    • What’s moving gold prices up.
    • What can happen to gold in the short to medium term.
    • And how to use gold as a hedge in this environment.



    What’s Moving Gold Prices Up

    When interest rates go up, gold—as a non-yielding asset—is supposed to go down, but we haven’t seen that in the last 12 months.

    Gold prices are up almost 10% over the last 12 months. More →

  • 09 Mar
    Want To Get The Best U.S. Companies At 50% Off? You Might Get That Chance Soon

    Want To Get The Best U.S. Companies At 50% Off? You Might Get That Chance Soon

    • A look at the DJIA from a valuation perspective will give us a good indication of future returns.
    • I’ll also give a cyclical perspective on stocks by looking at their CAPE ratios.
    • As well as explain how valuations usually contract and expand alongside earnings.



    Introduction

    Two days ago, I discussed how valuations may be the biggest risk to stocks at this moment. Building on that, I want to go through the Dow Jones Industrial Average (DJIA) and discuss the valuations there.

    The DJIA, unlike the S&P 500, is an arithmetic average weighted index and it is far less industrial than it was when it was formed in 1885. Nevertheless, it still gives a good impression of how the American economy is doing.

    What I want to build on are valuations.

    More →

  • 06 Mar
    Tariffs & Interest Rate Hikes – Does This Mean Doom & Gloom For Stocks?

    Tariffs & Interest Rate Hikes – Does This Mean Doom & Gloom For Stocks?

    • Last week was an eventful week for stocks. Today, we’ll discuss the long term impact of what has been going on.



    Introduction

    So last week was another down week for the S&P 500 and from what’s going on, it looks like it’s something we should get accustomed to. More →

1 2 3 4 7