A special note from Edelson Institute Executive Director Mike Burnick: John Isaacson is a chartered market technician who began working with our founder Larry Edelson in 2002, after several years of trading Treasuries, commodities and equities professionally. John is a master at reading charts, spotting support and resistance levels, and setting price targets and stop-loss levels for our Real Wealth Report, All-Weather Trader and other services across the Institute. Today he’s stepping out from behind the scenes to tell you what Larry’s AI models say stocks look set to do this summer.
The caution flags came out for equity investors last week after tech stocks plunged. The question now is whether that setback is just a blip in a bull market or the start of something more significant.
The one-day slide in the Nasdaq-100 of 2.4% from a record high was a surprise to some. And for good reason: It hints at exhaustion and is a warning sign of more challenging times ahead. In fact, upside momentum is waning as the euphoria surrounding tech companies approaches 1999-2000 levels.
Sure, traditional valuation metrics are not in bubble territory. Plus, there have been some downward revisions to the second-quarter S&P 500 earnings outlook. But the broader-market index is still forecast to grow north of 6.5% on a year-over-year basis.
Still, there are a handful of factors that point to lower stock prices in the nearer term. And I simply can’t ignore them …
Equities are richly valued and leave little room for disappointment. According to FactSet, the forward 12-month P/E ratio for the S&P 500 stands at 17.7. That’s 15.7% above the five-year average, and 26.4% above the 10-year average of 14.0.
There’s been a downshift in economic growth, including paltry job-creation, a downtick in consumer inflation and flatlining manufacturing activity in recent months. There’s also concern that softer economic signals could force a misstep by the Fed. Especially after this week’s plan to begin unwinding its $4.5 trillion balance sheet later this year.
U.S. political uncertainty remains, and the growing partisan divide in Washington presents a significant hurdle for the Trump administration. That includes pushing through their pro-growth agenda like tax reform, repealing the Affordable Care Act and pursuing a bold infrastructure program. This situation is made worse by debt-ceiling negotiations and the latest probe into President Trump for obstruction of justice.
But there’s more.
One of my favorite indicators for market timing is an Artificial Intelligence model developed by my friend and colleague, the late Larry Edelson.
Right now, it shows the uptrend in the Dow Jones Industrial Average is on borrowed time in the nearer term, with a sharp sell-off into the early August time frame …
As you can see, the above chart of the Industrials shows a swift (and large) decline in the coming months. And it’s likely that the selling turns into bouts of panic as the buy-and-hold momentum players rush for the exits at the same time.
I also expect market liquidity to dry up as high-frequency traders dial back risk and adjust their models. That should put even more pressure on prices, just like I experienced while trading bond and currency markets during the 2008 financial crisis.
Take this as a warning call to adjust the risk-profile in your portfolio. Reduce exposure in high-flyer names and free up cash at these lofty market levels. This will help avoid panic and provide fodder for better trades down the road.
In addition, consider taking advantage of historically low equity-market volatility. You can do that by buying downside protection such as September and December put options on the major market indices.
But as was the case in 2008 … and in many market hiccups throughout history … it’s usually darkest before dawn. The stock market will regain traction. And when it does, like the E-Wave Model forecasts, it’ll be time to deploy fresh capital in high-quality blue-chip companies
Cheers,
John Isaacson
Stanley Shapiro July 28, 2017
according to one future Edelson model, gold was to have bottomed in the current July period. Is that still the case.
jbuscher1 July 7, 2017
Boy do I miss Larry!
Jerome Buscher July 7, 2017
7/7/17 Boy do I miss Larry!!
James June 29, 2017
Is there gonna be a gold tranche, a return to the gold bullion standard? Maybe even a gold rush? How big a gold rush will there be? A massive gold rush more like!!!!! A return to the good old days of an cournot oligopoly? How’s this gonna effect an avalanche of gold that we are in for? How about silver is there gonna be a boom in this? How about the other precious metals in the precious metals market? Is there gonna be an avalanche in that? Whereabouts in the boom, recession, depression, recovery and growth cycle are we at? This boom that we are in for could be possibly one of the biggest booms that we are possibly in for? A boom to beat all booms. How’s this all gonna effect the cobbe Douglas production function? Are there gonna be increasing returns to labour and capital in the cobbe Douglas production function. Are alpha and beta gonna be greater than one? Are there gonna be economies of scale the advantages of large scale production? Are we in a massive boom, a boom even then the last boom. How’s this all gonna effect the solow growth residual? Is there gonna be growth in returns to labour and capital? Are we in for a massive boom, that’s what I think we are in for.
Kind Regards
James
don June 22, 2017
I forgot Larry was gone. He will surely be missed.
Steve Pomfret June 21, 2017
The advantage of Lithium is it makes batteries that are light weight. Low weight is what you need for a car for maximum efficiency. I have solar panels on my house that produce electricity that the solar company charges me 11 cents per Kilowatt. The local electric company charges me 18 cents per kilowatt. So over a year solar saves me 40 percent on my electric bill. My electric bill averaged $100 per month prior to the solar. After solar it averaged $60 per month. We then purchased a Chevy Volt that we plug in most of the time and hardly ever go to the gas station. My electric bill is back up to $100 if I run the Volt on electricity.
I did not pay a cent for solar panels. The solar company owns them.
jskemp4you June 20, 2017
I sometimes wonder what Larry would now be saying. Would he for instance be saying, that the distinct likelihood of central banks around the world becoming MAJOR investors in STOCK markets, is a major new matter to take into consideration, when the relevance of historical data of market valuations is being discussed. I for one have missed out on huge increases in stocks because of recommendations from experts as to “buy up to price”. If, the funds of central banks become a major force, surely there can be only one way for the markets to go. Of course, the euphoria will only last for a few years, but long enough for the small investor to profit. When Larry talked of a tsunami of funds coming from Europe and Japan, he did not know of the current thinking of global central banks. Their resources are significantly higher than the tsunami that Larry envisioned. We have already seen where a major central bank is the largest shareholder in a FANG company – more will follow.
John Kemp
Al McNal June 20, 2017
Thanks for this latest view. It agrees with my view of the technical perspective and I am pleased to receive confirmation of my ideas. The leadership has faltered. 3 IWM breakouts have failed so far. Summer weakness seems to be speaking and economic growth isn’t strong enough and faltering globally considering stock market breakouts. Politically it seems unlikely that anything positive will happen in the US. It’s all demonstrating a bad societal mood.
rschubring June 17, 2017
The big fundamental factor at work here, is the Tech Stocks’ war on energy. Tesla’s hucksters would have us believe that their self-driving autos will self-drive to a charging station, load up on grid power, then run around town giving rides to strangers for money, recharge again, head to our work, pick us up, drive us home, then sit in our garages and recharge with juice from our Tesla Powerwall. And fossil fuel, like Karl Marx’s Dictatorship of the Proletariat, will simply wither away into uselessness. Since all of this will consume prodigious quantities of capital, Tesla hucksters now insist that robotic means of production will make capital obsolete, by continually creating more of it. Guaranteed incomes, anyone?
I admit that the Powerwall has one selling feature that has electric utilities appetized. Every time a cheap electric motor, like the one that runs your home fridge or air conditioner, starts up, it causes what engineers call a Frequency Disruption on the power grid. While the motor accelerates up to running speed, it puts what engineers call a “reactive load” on the grid. This reactive load can be visualized by imagining what happens when you park your car in mud and then try to drive out. The mud makes your wheels spin uselessly, and goes flying around, until your wheels dig down into something firm enough to give them traction. Well, reactive loads are the same way. They waste current-carrying capacity in the utilities’ transmission lines, which makes them run hotter and obstructs the flow of energy to other equipment, causing brownouts.
What the Tesla Powerwall promises to do, is store some solar energy in a battery, and then re-inject that energy into the power grid, strategically timed, to counter the reactive load, every time a cheap motor starts up. (The expensive motors at big industrial factories use Smart Starters to overcome this problem. A Smart Starter spins the motor up gradually over about half a minute or more, filtering grid power through a rectifier, capacitor bank, and variable-speed inverter, until the motor reaches operating speed, and then connects the motor directly across grid power for efficient running. Smart Starters require three-phase power, which means pulling two extra wires into every circuit. Factories are required by utilities to use these efficiency methods, to get favorable prices for electricity. Home customers are not.). By offering this retrofit to our power grid, in which a handful of homeowners take the financial risk of buying a solar roof and a Powerwall, then hoping to cash in on the power they sell back to the grid and probably not making nearly the profit they expect, Tesla is offering utilities a way to de-congest the grid, without having to force their residential customers to buy efficient motors. As a result, utilities are willing to take a hit to the profitability of their generating plants, because they get more carrying capacity from their existing investment. If demand increases, the capacity is there, and they need only buy more gas and coal to satisfy it.
It’s a clever idea.
So is mass-producing lithium ion batteries for portable electronics.
Using those expensive lithium ion batteries in Powerwalls? Not so smart. The advantage of a lithium battery is it’s light enough to carry in your pocket. A lead battery that sits stationary against a wall, is a lot cheaper than a lithium battery and serves the same function. Replacing all the world’s lead batteries with lithium would create some lithium fortunes, but because toxic batteries by law must be recycled, someone would have to subsidize the scrapping of all those lead batteries. President Obama seemed to have gone to bat for Tesla, putting a line item in the Homeland Security budget for several billion 7.62mm bullets to be made and stored someplace. If that item falls to the Trump budget axe, Tesla needs to downsize it’s sales estimates for Powerwalls, because competitors will offer a cheap version of the same technology, using lead.
In short, Tesla’s stock could have a nasty correction that could let the air out of a sizable tech bubble, if anyone thinks to call their bluff. When that happens, stock prices will correct.
I strongly suspect the correction will take place, sometime between now and the Saudi Aramco IPO. Once renewable energy shares get priced somewhere near reality, the price of crude oil can remain low and shares of oil in the ground, can rise in value, because the oil will be seen to retain future value. Nobody’s making more of it, and until someone does, the supply must be made to stretch, to meet the need.
Dave June 16, 2017
Chart only half loaded and when I reloaded the page no chart came up.