The Week Ahead: How High Can The Market Forecasts Go?

The Week Ahead: How High Can The Market Forecasts Go?

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.

Market Wrap

The erroneous story from ABC news hit the markets hard on Friday as the S&P futures dropped over 40 points in fifteen minutes. All of the major averages rebounded for the rest of the day. The sharp likely cleaned out many of the weak longs as those who sold in a panic had a rough day. It was a good week except for the tech shares.

The rebound from Friday’s lows capped in a strong week for the markets with the Dow up 2.9% and the S&P 500 gaining 1.53%.  The small cap Russell was hit hard during Friday’s drop but was still up 1.18% for the week but by far the 5.89% gain in the Dow Transports was the big surprise. As investors see the Dow above 24,000 some are looking at the at the 2018 year-end forecasts from Wall Street strategist.

The market internals did not keep pace with the price gains last week as there were 1687 stocks advancing and 1382 declining.  This is in contrast the better than 2-1 positive A/D ratio the previous week.

The NYSE Composite came very close to its weekly starc+ band last week and this week it stands at 12,696 with monthly pivot resistance for December at 12,808.  This is just 1.5% above Friday’s close.  There is strong support at 12,177 and the rising 20 week EMA. The weekly NYSE Advance/decline line made a new high last week and is well above its rising WMA. There is long term A/D support at line a.

The Spyder Trust closed the week at $264.46 and the weekly starc+ band for the week ahead is at $266.10. The December pivot resistance (red line) is at $268.83. The Friday low at $260.76 and the rising 20 day EMA at $260.10 are now the first levels of support. There is additional support in the $258-$259 area.

The weekly A/D line turned sharply higher last week and the daily A/D line made a new high last Thursday. There are no signs of a top in the daily A/D as it is well above the rising WMA.

The PowerShares QQQ Trust (QQQ) closed the week down just over 1.1% as the daily starc- band was tested on both Wednesday and Friday. The weekly low at $152.26 was not far above the monthly pivot support at $151.71. The support from the September and October lows, line a, is at $151.13 with additional support in the $149-$150 area.

The Nasdaq 100 A/D line made a new high Thursday but turned down on Friday. It is above its WMA and the breakout level, line b.  The uptrend, line c, could be tested on a further decline but it would take a drop below the late October lows to weaken the intermediate trend. The weekly A/D line is well above its rising WMA.

The February Crude oil contract closed up 5% in November as it has reached the resistance, line a, that goes back to late 2015. The 38.2% Fibonacci retracement resistance from the 2014 high is at $58.00 and was exceeded during the week. The monthly starc+ band is at $61.26 with the 50% resistance level at $64.09.

The monthly OBV has moved above its WMA but is still well below the long term resistance at line b.  The weekly OBV moved above tis WMA in September and is well above its rising WMA. The monthly Herrick Payoff Index (uses the price, volume and open interest to measure money flow) moved above its WMA in August.

It moved above the zero line in September and in November it overcame the major resistance at line c. This is consistent with a major bottom. The weekly HPI moved above its WMA in July when many were looking for crude oil to drop below 40%.

The oil and gas sector was one of the best performers last week as it gained 2.7%. Viper ETF investors and traders are long either the Vanguard Energy ETF (VDE) or the SPDR Oil & Gas (XOP). The weekly indicators for both indicate they can still move significantly higher.

What to do? Clearly long term investors should stay with their core long positions and do not worry about the price levels of an individual market average.  In June 2016, with the S&P 500 trading at 2105, I again recommended “dollar cost averaging program … in a broadly diversified ETF”.

My view at the time as that “Very few analysts or investors are looking for sharply higher stock prices in the 2nd half of the year but I think it is a real possibility. I would not be surprised to see the S&P 500 reach the 2200 level and 2300 is a real possibility”. The yearly high on December 14, 2016 was 2278.

Investors should stay long until the weekly A/D lines have formed negative divergences like they did in May 2015.  Before that can occur there needs to be a correction of 5% or more where the A/D ratios are quite negative.

Of course the daily A/D lines will top out first and then move into the corrective mode. The recent new highs in the daily A/D lines means that the market’s short term trend is also positive. This means that the higher 2018 S&P 500 targets from the Wall Street strategists are attainable next year.

Trades should pay more attention to the daily A/D lines to identify corrections as well as periods of consolidation. This will allow them to move into inverse ETFS during corrective periods.

It is also possible that there will be signs of a top before 2800 or 2950 is reached so don’t fixate on a particular price level. There are always some individual stocks that are just completing continuation patterns and they can often provide good trading opportunities.

After last week my Viper Hot Stocks scan revealed over 30 stocks with new weekly buy signals. They will be reviewed to find those with the best technical patterns for Monday's report.

Investors or traders might consider the Viper ETF or Viper Hot Stocks services where reports are sent out twice each week. Each report is just $34.95 per month that includes five recent trading lessons.

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