S&P 500 Market Outlook January 2017

Market Analysis 

S&P 500 Market Outlook 

January 10, 2017


SUMMARY

  • Weight of the evidence suggests further gains in the cyclical bull market advance – SPX 2600 by May/June 2017 (?)
  • Monetary ‘triumvirate’ – inflation + rates + Fed – could lead to mid/late-2017 to early/mid-2018 cyclical bear market
  • Historical measures of market valuation suggest a cyclical bear market ends with the S&P 500 trading for at least 15x earnings, or sub-1,800

DISCUSSION

Some attribute the post-election market rally to Trump’s business-friendly agenda, but the fact of the matter is that the ingredients for the rally were in place months prior to the election. The biggest ‘tell’, as outlined in the November outlook, was the highly bullish advance/decline line, which measures the underlying supply and demand for equities. The AD line, among other supply and demand indicators, has only continued to confirm that there is likely material upside left to this cyclical bull market rally.

And while some sentiment measures indicate short-term consolidation could occur, I cannot emphasize enough how bullish the underlying supply and demand picture is for this market and how careful market ‘bears’ should be. In my opinion, all the bears have going for them right now is very short-term analyses such as this rate-of-change graph.

Risks are looming, however. Rising inflation + rising rates + a hawkish Fed form the monetary ‘triumvirate’ that I believe will ultimately lead to this cyclical bull market’s demise. A ‘black swan’ is always a possibility – by definition – but more often than not, the bull market killer is lurking in plain sight. In a recent lighthearted 2017 Prognostication piece on 17 Mile, I outlined a potential path for the S&P 500 through 2018.

  • 15% rally to 2,614 – or approximately 22.5x earnings – by May/June 2017
  • “Short and May” and go away
  • Fed begins to respond aggressively to rising inflation, tipping US economy into a recession with magnitude somewhere between 1991 and 2000-2002
  • 6-9 month cyclical bear market into early/mid-2018
  • S&P 500 de-rates to 15x earnings, or approximately 1,743 (-33% decline)
Now, of course, managing to such a detailed outlook is nonsense. But the overarching point is, as I will walk through below, how bullish the current market configuration is.

WRITE-UP

Via Seeking Alpha.

DISCLAIMER

The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.

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