February 10th, 2017

Subscribers Alerted to the New Bull Market

I’m sorry for those of you who aren’t subscribers.  On August 7, 2016…..before the elections, and way before the “Trump bump” was launched……my subscribers were alerted to the fact that the market appeared to be building a head of steam and getting ready to melt up.

On the previous Friday, August 5, the S&P 500 closed at 2182.87. Since then, the market has advanced above 2300, or 5.9% higher. Furthermore, as explained in that report, we envisioned an interim target of 2450, or an advance of 12.2%, for some time in 2017. We began assembling a balanced portfolio of over 50 stocks since then that, almost unanimously, have performed as well or better than the average S&P 500 stock.

But  the only thing you can be sure of is that circumstances continually change. To not be caught off guard, subscribe to the Stock Chartist newsletter.

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Heating Up On the Way To A Bubble Melt-up?

Because I’ve been looking down for so long that it feels uncomfortable to lift my head and start looking up.  The market isn’t yet shouting but has begun whispering that something has changed, something both fundamental and technical, action that’s been confirmed by a Perfectly Bullish alignment in the Momentum Meter’s moving averages.  Rather than being rebuffed at the 2175 level, a favorable jobs report Friday morning helped push the average to a new all-time high close of 2182.87.  The change could be as simple as investors no longer viewing “good news as bad” (since it gives the Fed room to raise rates) but instead “good news as good” (since it means strength in the economy and possibility of resumed sales and earnings growth).

S&P 500 - 20160805 ST

Rather than looking backwards for the correction that has yet to materialize, it may be possible that the market is warming up and heading towards the long-awaited melt-up.  What sort of technical obstacles or resistance levels might there as the market advances further into uncharted, all-time new highs territory?  About the only clues are in the “reversion to the mean” trendlines:

S&P 500 - 20160805 LT

The orange trendlines (solid for outer boundary and dotted for the mid-point) in the above chart ascend at approximately 7.5% and have contained all the market’s movement since 1939 through two Secular Bear Markets (1970′s and 2000′s), four wars (WWII, Korean, Viet Name and Middle-East Wars) and countless political and economic upheavals, domestic and international.  So they are “reliable precedent” indicating the possibility that the market’s next move could actually be an assault on the mid-point trendline at around 2450 in the S&P 500 Index, or 12% above Friday’s close?

Without getting carried away and turning euphoric, there are many rationales about why a move of this magnitude is possible, the primary of which is that the world is awash in cash looking for a place to be invested.  Before there’s general inflation of hard assets and wages there could well be an acceleration in financial asset inflation:

    • According to Moody’s, five companies, ( Apple, Microsoft, Google, Cisco and Oracle) were sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015, most of which was overseas to avoid taxes.  Both political campaigns may propose tax incentives for repatriating and investing the cash.

Corporate Cash Holdings

  • Institutional investors have been sidestepping equities and investing in fixed income instead.  With interest rates on the verge of moving higher and equities continuing to advance, they will begin rebalancing in favor of equities.
  • Foreigners continue to look at US equities as a safe haven.
  • Mergers, corporate buybacks and a dearth of IPOs have all contributed to a stock shortage just when demand is beginning to increase.

So rather than fighting it, we have to face “reality” and embrace it:

Reversion to Mean - lt

The market could be heading up the mid-point trendline and, if a bubble melt-up in equities does materialize, head all the way up to the upper boundary above 3500 in the next year or so.

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