Tax Reform and the Stock Market’s Relationship to the Media (11-04-2017)

I agree with analysts who say that the recent rally in U.S. stocks has been at least somewhat driven by optimism that tax reform will happen. I find it ironic that the U.S. stock market has performed very well during the Trump administration despite the fact that the mainstream media is portraying his presidency with a decidedly negative slant.

In general, Wall Street-style business conservatives are not thought of as Trump supporters. They are generally thought to be supporters of either Republican or Democratic establishment politicians. Thus, they are not the types of investors who approach the mainstream media with an inherently contrarian attitude.

But at the same time, the stock market is often ahead of the news. Back in 2009, the stock market bottomed out before there was any sign that the recession was shallowing. Furthermore, at that time, the reaction to the Obama administration in financial media had a somewhat negative bias. The actual reporting of financial news was fairly neutral, but doomsayers critical of the administration were getting a disproportional amount of air time. After the market bottom in 2009, there was some sort of drop almost every time Obama announced a new policy proposal, but the trend remained higher.

Sometimes the stock market can cut through the noise of the media to see what is really happening in the economy. In the case of 2009, there obviously was optimism that the end of the recession was on the horizon even though headline numbers didn’t show it early in the year.

At the current time, the stock market’s performance over the past year clearly indicates that long-term investors see signs of an imminent acceleration of economic growth. In October 2015, I wrote that I expected the eventual top of the bull market to occur between 20,000 – 26,000 on the Dow.

If investors did not anticipate an economic acceleration, I would have expected the bull market to top out near 20,000, and it could have happened by the end of 2016, as I described in the post.

However, here we are one year past the more conservative target for a top, and the Dow has gone well above the lower end of my target range (last closing price was 23,539). This, to me, suggests that the market really does anticipate an economic acceleration. And it suggests something bigger than the uptick in GDP over the last couple quarters – similar growth spurts have happened throughout the bull market only to fizzle out within a year, and at market prices as high as what we have now, I don’t think investors would get so excited over it.

If there really is going to be sustained, improved economic growth, tax reform is the only source of it that I can see. That is why I think long-term investors really do expect tax reform to happen amid the current political environment.

But what would that mean for the market over the next few years? Lower corporate and personal income tax rates would be a major boost for the market in the short term. I say short-term for two reasons. The first is that a lot of the economic gains may be priced in already. The second is that stronger economic growth will accelerate the rise in interest rates, which would eventually become bearish for stocks.

As you know I have been calling for a bull market top by the 1st quarter of 2018. Tax reform could extend the bull market further into the year, but I still see the 2019-2020 timeframe as either flat or bearish. It is also probable that there will be a recession of some magnitude by 2020. Since the Great Depression, there has never been a continuous economic expansion lasting longer than 10 years, and the current expansion will be at 9 years in mid-2018.

That said, it is worth noting that the interest rate cycle associated with the current expansion is still in it’s early phases, and if there is a stimulative change in fiscal policy, the next recession could end up simply being a technical contraction that, despite rattling markets for a while, would not have a major impact on society at large.

But in any case, the economic and political events of the next 3-6 months will be critical to forecasts for the next few years.

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Targets (10/14/2017)

ndx 10-14-17

For the first time since June, the NASDAQ-100 (NDX) is making new highs without immediately stumbling. While I don’t rule out the possibility of an imminent short-to-intermediate term top, the recent strength raises the probability of a continuing rally.

Zooming out to a longer-term Elliott Wave perspective, I consider the major correction during Dec 2015 – Feb 2016 to have been Primary Wave IV of the 2009 bull market. Since the Feb 2016 low, we have had two completed waves of intermediate degree (labeled in white). The third intermediate wave began at the Brexit low of June 2016. This third wave appears to be an extended wave, in which its subwaves are comparable to or bigger than the overarching intermediate waves in magnitude. These subwaves are labeled in white parenthesis.

Within this extended wave, it looks like we have four subwaves complete, with the fifth wave taking off from the recent low in July. In Elliott Wave theory, the magnitude if fifth waves is notoriously difficult to predict. Sometimes they top out before even reaching a new high. But if they make new highs, they usually do not exceed the magnitude of Wave I by a large margin.

Wave I, in this case, would be the rally from June 2016 – Aug 2016. If the current rally were to be comparable on a point basis, the projected top would be at 6250 on the NDX. On a percentage basis, the projected top would be 6427 on the NDX. This target range is indicated by the rectangle on the chart above.

But as I said above, the top could occur at any time.

After the top occurs, I expect an Intermediate Wave IV drop of 7-10% to match the Intermediate Wave II drop during April – June 2016. This drop would be followed by a final push to new highs to complete the bull market that began in 2009.

New Rally or H&S (9/1/2017)

ndx 9-1-2017

On Friday, Sept 1, the NASDAQ-100 briefly made a new intraday high. Short-term, I perceive the outlook to be unclear. On one hand, from an Elliott Wave perspective, the current rally that began on 8/21 could be evolving into Subwave 3 of the rally off the 7/2 low. However, before getting confident about that I need to wait and see if a head-and-shoulders is forming, with the left-shoulder on 7/27, and the head imminent.

Update (8-15-2017)

ndx 8-15-17

It is looking like the rally that I anticipated in my July 8 post has completed on the NDX. The market has been going sideways for about three weeks now. Although it is possible that the rally from the July 5 low could evolve into a five wave pattern (with the current sideways period being subwave-2), I find that unlikely given that the overarching five-wave sequence from the June 2016 Brexit low had a very long third wave, and a short fifth-wave would be expected to follow.

Also, the U.S. stock market is due for a major top in the Nov-Dec timeframe based on the Ascending Middle Section that I have been tracking since 2014. Between now and then, to fit the Elliott Wave pattern from the Feb 2016 lows we need a drop of 5-10% to match the Apr-June 2016 decline, followed by a final rally to new highs. To meet the timeline, the correction needs to get going in a meaningful way soon.

Rally about to resume? (6/8/2017)

NDX 7-8-2017

Thus far, the drop from the June 9 high on the NASDAQ-100 has been 5.2%. This is very close to the pre-election drop of 5.4% last year [shown on the chart as (1) – (2)]. Thus, a bottom could form any time now. Even if we get more downside from here, I expect the current drop to end up being milder than the 9% correction in Apr – June 2016.

Once the rally resumes, we should get a push to new highs to complete the extended 3rd wave that began from the Brexit low of June 2016.

Bullish Until Q4

Short-term, the U.S. stock market has been very difficult to call given that on many occasions over the last couple months, it has looked as if it was ready to go into a correction, but then churned to new highs once again. I now think that, if any drop occurs over the next couple months, it would only be about 5% in magnitude, matching the drop prior to the election last year.

Here is my current Elliott Wave count and projection for the NASDAQ-100 (NDX):

NDX Apr 9, 2017 Elliott Wave

Within Primary Wave 5 (labelled in blue) it looks like we have an extended third wave of intermediate degree (labelled in white).

My current target for a bull market top is Nov – Dec of this year. This comes from an instance of George Lindsay’s Counts from the Middle Section that I have been following on the Dow for two years now.

djia middle section april 9 2017

In this case, it is an Ascending Middle Section. Here is a link to an image of an idealized schematic of the pattern from another site: http://carlfutia.blogspot.com/2009/01/2009-stock-market-forecast.html

My chart above explains how the time proportions work. Depending on whether I put the 2nd point A (AA) in Jan or Feb 2016, the projected top is November or December of this year.

After this bull market tops out, I do not currently expect an epic bear market like 2007-09. I am still bullish on the economy for the near future. Thus, I expect that the next bear market in stocks will be a sideways period lasting two or three years, with a 20 – 30% drop occurring at some point in the process, possibly associated with a mild recession at the end of this decade.