In the past three years I have published a forecast for the market for the entire year and this year I am putting myself on the line again for no benefit to myself other than to draw out what I foresee and to get your reactions.
There is no way to disprove my forecast, so I will only be judged after the fact and even then it is just a best guess based on currently known factors, which are in themselves difficult to know what is discounted by the market and what the market is looking for down the road.
If you look at my past projections, you might want to take note and check back in from time to time to see how this is panning out.
Based on the continuity of the advance with each quarterly range moving steadily ahead from the previous quarter, I think it is fair to say this has been a fairly powerful bull market fueled by modest revenue gains and massive corporate buybacks and Federal Reserve injections.
If you remove the leveraging from the Fed, Corporations and Margin Account Buying, I feel confident that the market would be significantly lower. But, given that the overall market has had two massive bear market declines in the past 15 years, I think a more logical bear market is one that moves sideways to down over time instead of violently down at one time.
I can see violent declines to shake out weak-longs (margin buyers) and then I can see more violent rallies to bring those buyers back into the market only to reverse and shake them back out again. I think this is going to be a market-makers market. Selling rallies and buying declines is going to be a profitable strategy this year. 5% declines can be bought and 5% rallies can be sold and sold short.
I am looking for the year end to finish at the lows.
(NOTE: I can create another forecast for the DIA/DJIA as I have done since 2011 - See "Links to Related Charts")
Major bullish factors: 1. Fallen oil prices a major benefit to grease the economic engine and fuel consumer spending. 2. Corporations sitting on massive piles of retained earnings (but they are buying back stock and boosting dividends, but not reinvesting in their businesses). 3. Corporate profit margins are at rich levels. 4. The Federal Reserve is still keeping money cheap to borrow, hoping to stoke the economy. 5. Stocks are cheap relative to bonds because interest rates are so low. Inflation is low because of the internet and massive competition.
Major Bearish Factors: 1. Rising Dollar is a sign that foreign investors are flooding in at high prices, hurting our economic competitiveness. 2. Margin Buying is keeping the stock market afloat and could be unwound at any time for any reason. 3. The Government raised tax rates on stock gains once, and look to raise them again. In the past, rising capital gains rates is bearish. 4. Interest rates are the key lever to stock prices, if rates go up the stock market will go down. 5. The global economy is weak and China is steadily getting into a weak position. Demographics suggest weak spending for many years as boomers retire and cut back spending.
I suggest investing in stocks individually and avoiding the "overall market indexes". Know what you own and don't diversify. Understand what impacts each of your investments and don't count on a rising tide to lift your portfolio. It will take individual corporate success to drive growth in your portfolio. The era of "free market returns" is behind us, especially with interest rates at give away levels, which is hurting our retirees and savers. And lastly, as the Presidential Campaigns get into full swing by year end, the rhetoric and fear mongering will keep a chill on the overall market. As a strong-minded candidate takes the lead in the polls, the markets can then navigate the cross-currents that are in place now.
This is a great post, top quality here. Thanks for sharing Tim!
timwest
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I just reviewed the forecast from the beginning of this year and I see I was forecasting a period of EUPHORIA around the current time and current price that I had forecast.
Well, here is a little review of the CURRENT EUPHORIA that we are seeing:
I think the current top (as of July 23, 2015) is as CLOSE TO EUPHORIA as anyone could ever hope for.
1. The Greek drama seems to be discounted and major market crashes didn't happen. Considering the fear that was published everywhere in the press, despite the tiny size of the problem, it creates euphoria when it goes away.
2. The Chinese stock market melted down 30% in a few weeks and it didn't turn into a melt-down here in the USA = collective sigh of relief because "See how strong our market is!" mentality is a problem.
3. Apple Inc reported solid earnings and has $200 billion in the bank (using all legal tax avoidance strategies?), but the S&P500 earnings are now "flat" for the past two years using Generally Accepted Accounting Principles (GAAP).
4. Puerto Rico's $150+ billion potential bankruptcy isn't causing ripples in the market, ANOTHER collective sigh of relief.
5. Commodities plunge to 13+ year lows as global economies grind to a very slow gear. Massive losses pending for lenders to this sector. This wipes out REAL WEALTH from real loans backing real production power.
6. Crude oil's drop is free money for everyone to get the economy rolling again. The low crude price is debilitating the value of current loans to this sector which was a major driving force of our economic growth in the past 5-7 years.
7. The Presidential election is lingering on everyone's minds. So far it is a major distraction with Trump clouding up the airwaves.
8. The IRAN DEAL seems to have been well intentioned, but I thought we weren't supposed to negotiate with terrorists.(?) The basis of a contract is that both sides are ready, willing and able to back up what is written. Not so in this case.
9. The Fed and other central banks are always ready to support the financial markets, whether by buying up Gov't Bonds, Mortgage Backed Securities, (thinly traded equities, like the BOJ buys to prop up their market).... etc etc etc.
Justiceisfalse
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Are you suggesting that given that all of the above has failed to shake the market in any real fashion, euphoria is at max sustainable levels? If that is the case, will all good news have a muted response? And what could possibly contribute to a sell off?
With "bifurcation" being the word of the day, it seems that new-economy is going to keep pounding higher and the old-economy keep dragging things down. It seems extremely hard to figure out how this tug of war is going to play out and be manifested in the larger indicies. I currently don't know what to think and am glad to have an open discussion.
timwest
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I think the lists I proposed at the beginning of the year are still quite relevant. Before I wrote my last entry 30 minutes ago, I just asked myself "Are we seeing any signs of EUPHORIA?" and I felt that we had. And I agree the internet has completely changed the long term profitability of many corporations. Those that are harnessing the internet are creating fortunes and those that ignore the internet have lost fortunes.
claydoctor
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And, I will add, to #6, world wide economic contraction reacting less of a demand for oil, especially now China having bought heavy to store it for now last year, while oil producing nations pumping even more because their economies are contracting. And now Iran will be dumping on the market even more oil? I hear Timone (The Lion King) asking, "and everybody is ok with this?".
Justiceisfalse
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I fully agree that equities are white hot. That said, every reason that you enumerated, and those are major events, failed to push this market down. It seems absolutely ludicrous that asset managers still have hordes of liquidity that needs to be allocated and thus maintaining the constant bid in the market.
On the flip side, we dumped to a monthly pivot on the ES today (July 22) at ~2095 which was also a confluence of a fib retracement some daily and lower time frame MAs as well as a supply zone (see chart below). At the end of the day we can attempt to be political scientists, economist or what have you but we all trade price action, period.
[rant on] As I see it, the fundamental picture of Fed induced liquidity and the new economy ecplising the old economy is maintaining the bid in the market. Having lived through 2007-09 and learnt to trade in that period, I am expecting a glorious up in smoke moment which may or may not ever occur. [rant off]
claydoctor
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However, here's the deal. The last sign of a bull market is M&A, and we have major historic M&A, not just private sector, but a government that should be stopping some of these major mergers encouraging and allowing a non competitive marketplace by design. Corporate cash levels are historic. Stock buy backs are everywhere and massive, to ellivate stocks prices because they don't have the kind of real growth, sales, profits, and forward guidance to increase price fundamentally. So once the government says, OK enough, no more M&A, then what rabbit can corporations pull out of their hats to inflate stock prices? There is none, and the FED is out of bullets too. So if we don't create jobs, invite the given up looking for work employable back into the work force, and deal with real unemployment numbers (we are at 5.3, levels not seen in 4 decades) what more data does the fed need? Greed, and the need to keep inflating stock prices at all costs, morally, politically, or otherwise, drives the wolf my friends. Greece owes more than they can ever repay, but to keep stocks prices up, they loan them more just to pay themselves for a while. Shocked at Germany. Thought they would draw the line in the sand. No bubble? Its a greed bubble, and when it bursts, not sure when, it will expose the entire world at once for the farce this last bit of run has been. Should have corrected in October, but they kicked that can down the road, and its still being kicked. There is an end to this road. Its a doozey.
Justiceisfalse
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Nice commentary. I had omitted to mention buy-backs also adding to the incessant bid. However, the buy-back programs are going to fuel the private market and all that "disrupts" given that corporations have deemed it a better use of their funds to make shareholders happy in the short term as opposed to investing in R&D or acquisitions to grow the long term viability of the corp. So, I also think that the private markets and start-up culture are in a bubble-esque territory but it doesn't look like that is going to stop.
Regarding Greece, it roughly the size of Chicago. Like Greece, Chicago is also mismanaged and perpetually broke. There were headlines to this effect last week but the FX markets clearly didn't notice. The whole Greek disaster is blown out of proportion IMO by sensationalist media needing to run scandalous headlines about the eurozone coming apart. I could write a thesis here but will refrain.
I have a hard time commenting on employment, so I won't.