Saturday 6 January 2018

Weekend update - the outlook for 2018

It was a very bullish week for US equity indexes, with net weekly gains ranging from 3.4% (Nasdaq comp'), 2.8% (Trans), 2.6% (sp'500), 2.3% (Dow, NYSE comp'), to 1.6% (R2K). On balance, 2018 looks set for broad gains, at least to the 2950/3047 zone, with best case of the 3200/300s.

sp'500, weekly


The sp'500 settled net higher for the week by 69pts (2.6%), at a new historic high of 2743. Note the upper weekly bollinger at 2737, and which is climbing around 18pts each week. The 2800s will be technically viable in early Feb.

The outlook for 2018

First things first. A brief look back to 2017.

Original post:

My target of 2683 was just 9.39pts (0.35%) from the 2017 settlement of 2673.61.
Further, 3 rate hikes was correct, although I was off on the timing of hikes 1 and 2.

'3 to 4 minor corrections of 4-7%.... but nothing >10%'. Correct, in the latter, but even I was surprised we didn't see at least a few corrections of 4-7%.

Best guess for end 2018: sp'3245

The target is based on a fair number of things:

- At least one moderate correction of 5%.... but nothing >7%.
- broadly climbing at the rate of 40-60pts (1.75-2.0%) a month
- holding above the key 10MA, which by end year will be in the 2900s.

Primary issues for 2018

Earnings/growth. There has been a very significant shift in societal/financial sentiment since the Trump victory in Nov'2016, and I expect an acceleration in the US economy. I would seek annual growth of around 3.0%, with one print >4.0%

The tax cuts will be a boost, but far more so, the repatriation of corporate funds, which likely total at least 4-5 trillion. I'd expect a trillion to be wired back to the US by end 2018. There will be significant multiplier effects from such capital inflows, and frankly, the federal reserve should be somewhat concerned about an inflationary surge to 3.5-4.0%.

Inflation. For now, inflation remains subdued, but there are plenty of commodities - not least WTIC and Copper, that are both within m/t upward trends. If we see the CRB break >197 - as seems due by late spring, it will merit being seen as an important sign.

Rate hikes: I expect FOUR hikes (each of 25bps) in 2018, at the FOMC's of March 21st, June 6th, Sept'26th, and Dec'19th. That will take the target range to 2.25-2.50%, and would still be historically low. I don't see any reason the US economy - and associated capital markets, not being able to cope. Ohh, and don't forget the ongoing QT program. That will reach $50bn a month by end 2018, a rather significant annual rate of $600bn.

It remains ironically the case that the ultimate 'sell signal' is when the fed start cutting rates. As rates are now regularly being raised, the equity bulls can justifiably be increasingly confident.

Secondary issues for 2018

There are three secondary issues I'd like to highlight:

-Price structure in key stocks - BAC, INTC, X
-Price structure in world markets - China, Italy, Russia
-Commodities - CRB, WTIC, Copper

Price structure in key stocks

Frankly, I could list dozens, but I don't have the time, and it would overload the post. Instead, I will highlight just three: a financial, tech, and industrial.

Stock'1: Bank of America (BAC), monthly

BAC is clearly m/t bullish, and set for the $33s by late spring. Higher rates are a strong positive for the financials. Secondary target of 40/45 zone looks frankly... a given, considering the economy and broader equity market.

I've alluded to it a few times recently, but any price action above the 2007 top - the $45s to be decisive, would be monstrously bullish, on the order of a doubling to psy' $100. If you assume just 'reasonable' earnings growth, that'd still only see the forward price earnings (FPE) multiple climb to around 25/30 by 2020/21.

Stock'2: Intel (INTC), monthly

Yes, the stock has been rattled by recent processor 'issues', but broadly, the trend has been very bullish since the breakout in summer 2014. Any price action above the tech bubble top of 2000 (>$52.00 to be decisive) would be monstrously bullish, and offer far higher levels. I'd refer anyone to Microsoft (MSFT) which broke its 2000 top in summer 2014, that stock has since climbed from $40 to $85 across just three years.

Stock'3: US Steel (X)

US Steel only has a market cap' of around $7bn, but its a fine example of US heavy industrials. The stock is nearing multi-year resistance of $40.00. It failed in Feb'2017 to break/hold it, and the stock promptly imploded to the $18s. If X can attain a monthly close >$40.00, its technical 'open air' to soft psy' $50, and then $60. The latter is 53% above current levels, and it can be argued would have indirect implications for the main market.

Price structure in world markets.

I refer you to last weekend's post :

A number of markets are set to break up and away, lets take a look at three: China, Italy, and Russia...

China, monthly

China has started the year strong, currently +2.6% at 3391. There is a great deal of resistance within the 3400s. A monthly close in the 3500s would be decisive, and offer 4500 by end year.

Italy, monthly

The Italian market is already net higher for the year by 4.2% at 22762. Price structure from Nov'2017 is a bull flag, and will be fully confirmed with a break >23133. What really matters though is the 24000 threshold. A monthly close >24k will offer a grander run to at least 35k.

Russia, monthly

The Friday close of 1218 is the highest level since Sept'2014, and opens the door to a grander push of at least 20% to the 1500s. Implications for other world markets.


Lets take a look at the broader CRB, then WTIC and Copper.

CRB, monthly

The CRB is set to push above the key 197s, which will offer at least the 220/30s this summer. That bullish outcome would still be far below the highs from summer 2014 and spring 2011.

WTIC, monthly

WTIC is currently net higher for a fifth consecutive month, having just seen the $62s. Consensus is already swinging to the 70s, even the 80s. A few are even speculating $100, but that would likely require serious geo-political turmoil in the middle east, an inherently impossible thing to foresee. In any case, I favour Phillips 66 (PSX), Cheniere Energy (LNG), and Anadarko Petroleum (APC) on a mid term basis, along with the sector ETF of XLE.

Copper, monthly

Copper has seen $3.31 so far this year, and the $4s are not a particularly bold target by late summer. If correct, bullish implications for the related miners, such as Southern Copper (SCCO), Freeport McMoRan (FCX), and Teck Resources (TECK). Indirectly, upside in copper would be strongly suggestive Gold and Silver will eventually follow upward. Implications for the related miners, such as Barrick Gold (ABX), and the sector ETF of GDX.

Your guesses...

I'm not sure if it says something about your opinion of yours truly, but I only received one single submission.

2800: WavRider.

In closing

The 2018 target of sp'3245 might seem bold, but that only assumes a moderate acceleration in the rate of increase in various technicals (10MA, upper bollinger). I'm actually wondering if I'll be 100-200pts undershooting.

Clearly, a geo-political event - such as from the middle east or North Korea, is a valid 'wild card' threat. Yet, that was the case across 2017. I sure don't have a time machine, and I have to just assume things will remain in 'simmer mode'. One final note, and it has implications much further out...


Most chartists recognised the importance of sp'2138 as far back as 2009, and we saw how the market stalled at 2134 in May 2015. The next big fib' level of 3047 is just as important.

Let me be clear. If we see ANY price action >3100s, it will be decisive enough to declare a further powerful run to the 3900/4000 zone, being viable in 2019. Finally, sp'4865/5000 would equate to Dow 40/42k.

At some point a cyclical recession will occur, and as noted earlier, the moment the fed start cutting rates, will be the ultimate sell signal. Right now, that looks to be at least another 18months away.

Looking ahead 

Earnings: JPM, WFC (Friday)

M - Consumer credit
T - -
W - Import/export prices, wholesale trade, EIA Pet' report
T - Weekly jobs, PPI, US T-budget
F - CPI, retail sales, bus' invent.

*there is a light sprinkling of fed officials, notably Bullard and Evans (Wed')

**the market will be CLOSED on Mon' Jan'15th for MLK day. The Friday Jan'12th session will thus be inclined to be very subdued, once the econ-data and corp' earnings are out of the way in early morning.

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Have a good weekend

*the next post on this page will likely appear 6pm EST on Monday.