2017 And The Bull Market Continues

| About: SPDR Dow (DIA)

Summary

Poor corporate earnings in Europe could continue the 2015 trend of US markets exceeding European ones.

Rising US sentiment since the election has yet to translate into earnings appreciation.

Certain sectors of the SP500 which have been lagging oil and biotech could now support a further rise, as could speculation in US orientated businesses.

Source: Cartoosh Cartoosh

Having read some of the articles released at the start of the year, you'd think we were in a bear stock market. We're not, it's still a bull market and will stay a bull market up until it isn't. Here are a few supporting factors:

Every election cycle carries a 'euphoric' bull leg, then a correction, but really when have things been so easy that's it's been possible to predict a hefty market correction as from January?

How can previous election trade corrections tell us how business tax cuts will affect the markets this year or even capital circulate around the world?

As Seeking Alpha editors have already informed us, with the policy of negative interest rates, corporate earnings in Europe are looking pretty dismal, but trading the European stock recovery was the reason for dismal US stock market growth through most of 2015. So why shouldn't capital be attracted back to the US markets in anticipation of tax cuts, and a further boost to consumer spending, with the potential revision of Obamacare, (which has proved to be extremely expensive for a lot of American families)?

Barclays earnings Europe vs us seeking alpha

Here's the chart for Eurostoxx 50 in USD, which illustrates the performance comparison between 2015 (when Eurostoxx out performed the Dow), and 2016 when throughout the year, (not just following the election) the Dow outperformed Eurostoxx.

Eurostoxx 50 in USD vs Dow

Source : Bigcharts.com

Then moving on to the business cycle, (which isn't on a 2016 high either). Martin Armstrong's business 'confidence' and capital flows model delivers a rise through most of 2017, and he's also interested in a rising US market, at least into the Spring. I've chosen this particular chart interpretation because it's showing a second peak in 2018, (as opposed to a slide into 2020) although the outcome of a significant movement of capital into the US, could become more extreme in terms of the performance of the stockmarket. 2017.9 infers a high towards the end of the year, rather than September.

Armstrong Economics confidence model

Stockmarkets 'should' react to a stronger dollar, however there are a few issues:

  • Companies convert earnings into $USD periodically throughout the year, not at the same time, at the end of the year. A strong dollar impact will eventually develop but it won't all happen immediately, and the dollar is weakening in a correction from the December high.
  • A stronger dollar affects the reported income of international companies, not their viability, they can still have rising profitability from overseas income but their income report is down because of the requirement to convert it periodically to a strengthening USD, the reverse is true for a weakening one
  • At the same time as the markets are buying the stronger dollar for reported international income, companies with a domestic only gearing are rising in expectation of lower taxes
  • A considerable chunk of the SP500 is given over to oil and gas companies which are 'off' the 2016 bottom, and enjoying the income from higher oil prices.
  • Biotech companies are reacting positively to the election outcome, from an extreme previous reaction, which will also support the biotech heavy Nasdaq.

The chart below illustrates global liquidity at a low, which on its own suggests an imminent contraction. However whether that happens or not, can also depend on other factors, which may or may not have been present at previous market inversion points:

1) M2 money supply can increase in velocity as people become more confident in the economy so withdraw cash to spend it, (e.g the potential Trump effect), which was very much in evidence in December. US inflation can rise owing to an increase in velocity.

US consumer sentiment

On an international level, consider China's dollar spending policy, as well as Saudi's movement out of US bonds. The European negative interest rate policy hasn't changed, and that forces cash out of savings accounts to invest in 'something'. With poor earnings, is that investment more likely to be in the US or Europe? A stronger currency is connected to greater banking leverage. Rather than pursuing exports (China's export figures are actually flat), Chinese manufacturing is rising against a local services orientated economy.

Global liquidity source IMF

Then looking at the stock market charts themselves, it's still looking decidedly bullish, with longer term waves still running their bullish course.

Very long term, it seems as though what ever corrections there are, won't be long lived until several thousand points higher

Dow monthly

Dow Jones Original chart

Dow Jones 10 years chart

Traders should be wary of short covering highs, as bullish US consumer sentiment turns into tangible company earnings. I'm not discounting corrections, only pointing out that the extreme negativity that was circulating among letter writers after Christmas doesn't have a tangible basis, any more than extreme optimism.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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