We Should Expect Higher Stock Prices In the Next Quarter, Mid-year & By the End of 2018 - Here's Why - munKNEE.com
Tuesday , 24 November 2020

We Should Expect Higher Stock Prices In the Next Quarter, Mid-year & By the End of 2018 – Here’s Why

They say records are made to be broken and, so far, the US economy [and stock market are] on track to do just that.

The original article by Chris Puplava has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.

The Economy

The current economic expansion is now the third longest in US history going back to 1854. If it can survive through May 2018, it will be the second longest and, if able to survive to July 2019, it will officially become the longest US expansion ever…

Given the current trajectory and strength of leading economic indicators it appears that the U.S. economy may survive 2018 without the risk of slipping into a recession, raising the possibility of this cycle becoming the longest on record. This is shown below when looking at the US Risk Aversion Index (red line), which leads real Gross Domestic Product (GDP) for the US by 12 months. It began to deteriorate starting in 2015, and reached new cycle lows throughout 2016, but has rebounded since, suggesting a pickup in US real GDP for this year.

risk aversion index
Source: Bloomberg, Financial Sense® Wealth Management

The Stock Market

…The S&P 500 has been in a bull market now for 105 months (almost 9 years), making it the second longest bull market in history. If it can survive through September 2018, it will officially reach a new record to become THE longest bull market in US history.

Looking at other feats, as of January 5th of this year, the S&P 500 went the longest ever on record without undergoing a 5% or more decline. Given the current level of strength and momentum of the S&P 500, we believe this bull market is likely to be the longest on record and continue in 2018.

When we speak of momentum, this is not just an empty term—it is a quantitative measure that changes over time and hits extremes at market highs and lows. One of the most widely-watched measures to gauge momentum is called the relative strength index (RSI), which gives readings between 0 and 100. Bullish momentum is displayed at readings greater than 70 and bearish momentum at readings below 30. The normal way of using momentum is to measure relative strength over 14 periods and, just to give you an idea where we are currently (as of 01/23/2018), the 14-week RSI for the S&P 500 is 89.41—the highest reading ever seen in the history of the S&P 500 going back to 1928! Though momentum is certainly at an extreme reading unlike anything we’ve seen in 90 years, this is still a bullish signal for future market returns until momentum starts to diverge from stock prices, showing that the market is losing strength.

For example, consider a study by regular Financial Sense Newshour guest Craig Johnson, Senior Technical Research Analyst at Piper Jaffray, looking at future returns for the S&P 500 over 13, 26, and 52 weeks (3, 6, and 12 months, respectively) when the S&P 500 has a weekly relative strength reading of 80 (bullish momentum).

spx overbought returns
Source: Bloomberg, Financial Sense® Wealth Management; Hat Tip: Craig Johnson

Looking at the table above, the average 3, 6, and 12-month forward returns were all positive. What’s more impressive is that of those events in which the weekly RSI hit 80, the market was higher more than 80% of the time looking at the three measured time frames. Given those odds, history tells us we should expect higher stock prices in the next quarter, mid-year, and by the end of 2018.

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