In my last article titled "S&P 500 Upside Breakout - Don't Lose your Core Stock Positions - Yet," I described what constitutes a breakout in the S&P, as well as those levels the breakout both occurred, and should now act as support for continued upside. In this article I'll discuss the upside targets and timing for said targets, and several alternatives for how to rotate from a traditional equities portfolio, into cash and several sectors that are setting up for exceptional returns during the same timeframe as the anticipated pull back in the S&P.
First, let's consider the remaining upside in this current pattern structure in the S&P 500. As previously stated, the S&P has formed a classic i ii (i) (ii) setup, where the wave (i) formed a picture perfect price target hit of the .618 extension of the wave i (see daily chart below). We now look to the 1.616 to 2.0 extension of wave i to complete the iii at 3,108 to 3,216, followed by a wave iv that holds support and concludes with a final 5th up to 3,327 to 3,526. These are Fibonacci extension levels that have proven over time as a very reliable method to measure overall extensions in virtually all tradeable asset classes.
Now let's turn our attention to timing. Please refer to the S&P chart that shows the various Hurst Timing indicators at the top and bottom of the chart, along with the overall wave pattern that's occurring off the 2009 low. Based on the Hurst Timing Model, we anticipate the conclusion to the current wave (5) of the overall 3rd wave off the 2009 low will occur in the first half of 2019, again with price targets into the 3,327 to 3,526 region. Upon conclusion, both the Elliott Wave structure and the Hurst Timing Model suggest a pull back to occur into the overall 1.0 to 1.236 bottom up fib extension levels, which reside at 1,862 to 2,151, said pull back lasting approximately 18 months into mid to late 2020 timeframe.
Please keep in mind that while there is still reasonable upside from current levels, once this portion of the overall rally off the 2009 low concludes, the S&P will likely experience a 25% - 40% correction. For many investors, depending on where they went long the indices, the pullback will feel quite substantial, however in the context of the move off the 2009 low, it will be quite reasonable. I won't bother to opine on what might cause such a correction to occur, other than to suggest that it's a natural part of a bull market cycle. Unfortunately, while it might look and feel to some that it's a repeat of 2008, it will be anything but, and once the low for this correction is established in what we have labeled on this same chart as the green (4), the S&P should experience continuation higher in what will and enormous move up in wave (5) of V in the following 3-4 years after the correction completes.
So, while there is still an additional amount of continued upside in the S&P that will occur into the first half of 2019, upon conclusion of this upside the reward to downside risk skew begins to favor exiting equities for a period of 12-18 months, with an eye towards re-entering from lower levels. Put differently, the amount of upside potential is far less than the amount of downside risk, such that going to cash and awaiting re-entry from lower levels not only will preserve investor capital, but makes considerably more sense than holding out for whatever small bit of upside might remain. Many investors tend to feel as though cash is not an investment choice, as it offers little prospects for return. However, if equities are in a pro-longed correction while one is in cash, then they are preserving their capital vs. taking downside market heat, thus affording themselves the opportunity to buy back at lower levels, and therefore adding to overall shareholdings vs. those they held pre-correction.
Insomuch as investors do feel as though they should always have some portion of their capital allocated to investment opportunities, I would submit that there are alternatives for an allocation of a portion of one's capital into several sectors that should perform very nicely during the overall equities pull back. So, while there is other sectors that should perform during this time period as well, allow me to discuss two that we like and will be helping our subscribers to time entries and exits into.
Previous Metals Mining Sector
One alternative area to allocate investment capital I discussed in my article titled "Metals and Miners: The Wolf Is Close This Time." In that article, I discussed the opportunities that are setting up in the precious metals mining sector. Interestingly, and while this by no means suggests an ongoing inverse correlation, the mining sector appears to be setting up an inverse relationship with the S&P for the next several years. Again, put differently, what I'm suggesting is that while the S&P experiences a rather large correction, the mining sector is suggestive of a large move up.
See the HUI Goldbugs Index chart below, where we are anticipating the conclusion of a large wave 2 and/or B wave into later this year that should bottom in the 127 - 99 region, followed by a move up to 367 to 550 in approximately the same time period as we expect the S&P to conclude its wave (4) correction. This would provide a 3 - 6 fold increase in that portion of capital allocated to this sector.
As I stated in my prior article, we recommend no greater than 20% of one's total investment assets into this sector. By allocating 20% of your investment capital into a sector that triples in value, it would effectively reward your overall portfolio with a 40% return during the same time as traditional equities are correcting. So, would you rather experience a 25%-40% decrease in the value of your holdings, or a 40% overall increase? Quite obviously the answer is intuitive.
Natural Gas Sector
Another alternative area to allocate investment capital is into a long natural gas position. Note from the attached chart that we anticipate natural gas to bottom later this year into the 2.16 to 2.26 region, and then experience a several year move up the $6.75 to $10.76 level. That's the potential for a three- to fourfold increase in value during the same period of time the S&P is expected to experience a 25%-40% drop.
There are a number of ways for individual investors to participate in this move, including the use of the United States Natural Gas Fund (NYSEARCA:UNG), as well as leveraged ETFs that are purchased and sold at selective times throughout the rally. We suggest investors allocate no more than 10% of their investment capital to this sector, but with the upside potential for natural gas, one could add an additional 20% performance to their overall investment capital during the same period the S&P would be declining.
- We expect additional upside in the S&P to the 3,300 to 3,500 level before it commences a larger correction.
- Cash is a position also, and exiting equities and staying in cash during a corrective pull back will enable investors to re-enter similar positions at levels 25%-40% lower than the exited.
- There are alternative ways to experience profits during an overall correction in the S&P 500, several of which are the precious metals mining sector and natural gas.
In future articles I'll provide ongoing target levels for the S&P 500 that track along with the analysis provided herein.
Disclosure: I am/we are long DGAZ. 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.
Additional disclosure: We are currently long DGAZ to capitalize on the move down in Natural Gas