McClellan: "Gobs of Liquidity" to Fuel Markets Higher

Mon, Apr 24, 2017 - 3:38pm

The following is a summary of our recent interview with market technician Tom McClellan, which can be accessed on our site here or on iTunes here.

Recently, markets have been taking a breather. Are they signaling a temporary stall or something more worrisome? And what comes next?

This time on Financial Sense, we spoke with Tom McClellan, editor of McClellan Financial Publications about his take on current conditions and his expectation for a move higher in the second half of 2017.

Market Fears Aren’t Warranted

Right now, we’re experiencing what McClellan referred to as a healthy pause, which he expected. We’ll see a big rally into May, a swoon right after that into June, and the mother of all uptrends into the end of 2017 and perhaps beyond, he noted.

We shouldn’t listen to the bearish voices and overvaluation scenarios we’ll hear before the second half of the year, McClellan added.

“The last half of 2017 is going to be a really exciting time for the bulls,” he said. “We’re still wading through choppy waters right now before we get to that big rush. Then it’s going to be time to invest and hold on for all it’s worth.”

He hasn’t called for a specific price level, but the main point is to get the direction right, he said. Though we’re not quite at the inflection point yet, he’s already fully invested and bullish, adding that he expects the bottom in June.

“Get ready to think the opposite from everybody else … and get ready to fade the enthusiasm in May, and buy the pessimism in June,” he said.

Fuel for the Move Higher

McClellan sees several confirming signs of a new uptrend getting started, he said. More important than the catalyst for the move higher is the source of fuel, he added.

“The fuel for this (expansion) is that there are gobs of liquidity out there,” McClellan said.

This capital will continue to go to work through the middle part of 2018, with an emphasis on the latter half of 2017, where the steepest up phase will occur, he stated.

One of the signs of strong liquidity is the New York Stock Exchange advance/decline line, which just made a new all-time high last week. If we observe the price indices lagging behind, but the advance/decline line is making a new high, that’s very positive for markets because it indicates liquidity is strong, McClellan stated.

Liquidity shows up better in the small caps, he stated. The reason is is, small caps are much more sensitive to liquidity, for either good or ill, so if they start doing well, that means liquidity is good. That’ s why it’s useful to pay attention to the advance/decline line, he added.

It’s important to catch this up phase, he noted, though he does expect an ugly phase for markets in the second half of 2018, followed by stock recovery into the early 2020s.

“That strong liquidity is going to come around and lift all boats eventually,” he said. “I’m very excited about small caps right now. … They are the least deserving of your money, so when they’re getting money, that means there must be a whole lot of money to go around, and it’s going to help everybody.”

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