2017: Euphoria...Then Panic
The stock market should see positive gains this year followed by a possible crash in the second half, technical market analyst Clif Droke says in his latest interview with FS Insider.
“In the seventh year of most decades, we tend to see surprising strengths in equities, particularly in the period from March through July – that’s when the upside potential is best for stocks,” Droke said.
However, he warns, what goes up must come down, and Droke expects a decline around October following a midsummer peak. In some Year 7 models, declining strength can sometimes result in a crash as well. He expects the market to “stick to the script” in 2017.
Droke said the following in a recent note:
Crashes, mini-crashes, and panics are quite common in the seventh year (e.g. September 1987, October 1997, February/August 2007). It will do us well to keep this in remembrance as we enter what promises to be a year filled with tremendous opportunity for making money in the stock market – in both directions.
Droke explained to listeners how Trump’s economic policies are encouraging more retail investors to flock into stocks, particularly those that remained in cash for the past 8 years under Obama.
“Investors are slowly warming up to the idea that if they want a return on their money, they’ve got to go into the stock market,” Droke said. Since the November election, nearly $46 billion has flowed into US equity funds.
When it comes to the sustainability of the stock market's current advance, Droke points to his "New Economy Index," which is a simple average of large, economically-sensitive retail and business-related stocks. Currently, it is sitting at an all-time high and not flagging any warning signs, he said.
“Not only is [the New Economy Index] reflecting tremendous strength in the US economy, it suggests that strength should continue to flow forward in the months ahead,” he noted.
The specter of rising interest rates shouldn’t dampen a bullish surge this year, Droke believes. According to the “K-Wave” model, rates and other indicators can be charted based on a 60-year cycle. According to that model, Droke says, interest rates bottomed out in 2014, so we should expect rate increases this year.
However, the simultaneous upsurge in stock prices should defuse any dangers posed by a rate bump. In fact, rising rates could benefit investment in real estate since potential homebuyers will rush to lock in lower mortgages rates.
“The fear among investors that rising interest rates are going to be the death knell of the bull market is premature,” Droke said. He adds that down the line, runaway rising interest rates could harm the stock market and the wider economy.
“But we’re a long way from that,” he added.
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