2017 has been quite a year. And it’s ain’t over yet.
It’s been fashionable to call the market “stretched.” Or even “extremely disconnected from reality.” So why would stocks be approaching a stopping point?
Charts suggest the bull market is at or near very strong resistance. Case in point: S&P 500 futures.
The pattern has unfolded in textbook fashion and is nearly identical to historical patterns.
Risks remain numerous. But investor optimism is ubiquitous.
A University of Michigan sentiment survey shows just how hopeful retail investors have become about this market.
Current levels of hope eclipsed the peaks in 2015 and 2007 just before the Great Recession. This is a contrarian indicator worth watching.
None of this tells us exactly when a stock market correction will begin. The rally could enjoy what’s often called a “Fifth Wave Extension.” However, as a protection against downside risk, I recommend holding your small hedge position in ProShares Short QQQ (PSQ). Tech stocks have been high-fliers all year and will be vulnerable if broader-market sentiment turns sharply. Hold this inverse ETF as a hedge against an imminent market correction.
A change in sentiment will hit more than just U.S. stocks …
The euro looks vulnerable, too. In part, because U.S. interest rate expectations are supportive of the U.S. dollar. Risk aversion may also be supportive, since lots of capital has flowed into European markets this year. If risk aversion causes capital to flee European markets, it could mean euros are converted back into the currency of origin (e.g., U.S. dollars or Japanese yen).
Whether it’s just an interest rate story or something more, I think the euro is vulnerable. Hold your ProShares UltraShort Euro ETF (EUO).
After a sharp correction, platinum is bouncing back. Considering the potential for risk aversion, platinum could catch a safe-haven bid like gold since it’s considered a precious metal, at least in part. Hold your ETFS Physical Platinum Shares (PPLT).
Last month, I recommended you add shares of Green Plains Energy Inc. (GRPE). Crude oil and energy seem to trade independently of risk appetite and the U.S. dollar these days. So, sit tight and wait for what I expect should be a sharp rally for GPRE.
