Tuesday, January 02, 2018

stock market update

My last stock market post was written nearly a year ago. During the past year I have thought about putting up another post on the subject but didn't feel I had anything new to say.

Above this post are daily charts of the three main indicators I use to evaluate the market's trends. You can see that each chart shows the market climbing steadily higher through the year. In fact not once did the 50 day moving average (green lines) turn lower in any of these charts. The market has stayed well above its 200 day moving average (red lines) in each case as well.

The S&P has reached the 2,700 target I suggested more than a year ago and the Dow has traded above my 23,000 target.

As I pointed out a year ago George Lindsay's long term stock market timing methods suggest a likely bull market top during the next three months. The 15 year 3 month period measured from the October 2002 bear market low expires in January 2018. A 22-24 month basic advance measured from the February 2016 low would end sometime during the next two months.

Right now there is no sign that a bull market top is imminent. I would expect extensive sideways activity accompanied by a flattening or decline in all the 50 day moving averages before any bear market starts. In the meantime another 10% advance from current levels is a plausible projection. This would put the S&P near the 3,000 level and the Dow near 27,000.

The bull market which started in March of 2009 has lasted nearly 9 years now, an extraordinary length of time without a big decline. It has been fueled by a dramatic expansion in the balance sheets of world central banks. The expansion in the Fed's balance sheet has ended but both the Bank of Japan and the European Central Bank are continuing their own expansions. The net result is continued growth of the world-wide balance sheet.

As I said in my post a year ago world-wide economic confidence is growing stronger after many years of stagnation. This growth in confidence reduces the demand for liquid, safe assets which the central banks are still manufacturing. Consequently world-wide asset prices are still trending higher as investors exchange liquid assets for risky ones

For this reason I think that any drop from a top during the next three months is likely to be a shallow one - say 10-15% or so. A really big drop in world stock markets of 25% or more will probably begin only after the ECB and the Bank of Japan halt and reverse their balance sheet expansions. In the meantime we are likely to see the S&P at 4,000 and the Dow at 36,000.

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