Outlook for the U.S. Stock Market & For President Donald Trump

I don't think it would be a stretch to conclude that the so-called "Trump Bump" has run its course in the financial markets and that traders and investors will now look to a new set of drivers for U.S. stock prices ahead.

President Trump's agenda of (1) Healthcare (Repeal & Replace), (2) Tax Reform ("Trickle Down" Tax Cuts for Corporations and the Upper Class), (3) Immigration (Lockdowns, Bans, Border Walls), and (4) Infrastructure Repair & Rebuild is in disarray, and that the majority Republican Party in Congress is now split beyond repair and can not govern effectively.

Donald Trump's Russian connection will dog his presidency for his entire tenure in the oval office, cast doubt on his legitimacy, cloud his legacy, and maybe even take down his entire administration. The Democrats in Congress are emboldened by Friday's failure by the Republicans in the House of Representatives to pass the latest version of "Repeal & Replace" healthcare legislation. President Trump seems to have taken this defeat in stride and now claims that Tax Reform will be next up on his "agenda" and will command his full attention and any remaining clout his office may hold.

Stock market bulls are counting on Trump tax cuts to justify current sky high valuations and to serve as a potential catalyst for even higher prices immediately ahead. Unfortunately for bulls, Trump's failure to repeal and replace Obamacare casts serious doubt that ANY substantial tax reform legislation will ultimately be passed in Congress, as the Republican majority splinters in disarray and individual Congressman actually begin to distance themselves from the White House with a close eye on the 2018 November re-election cycle and self-preservation.

How much does all this matter in forecasting U.S. stock prices ahead?

Even though I've personally witnessed and participated in 40 years of fluctuations in financial asset prices, and even though I think that I am better than most at reading the tea leaves that determine future prices, my confidence in the usual fundamental and technical analytical tools for most market watchers is significantly less than where it was a decade ago. I now feel that the only edge that I have in "beating the market" is my computer trading system and its relatively reliable buy and sell signals.

While daily chart signals that are generated every day in my system are always interesting to review and dissect, the more reliable signals come from weekly and monthly chart algorithms within my program.

Interesting official weekly chart sell signals in Google, NetFlix, Lockheed Martin, Illinois Tool Works, and Raytheon, (among others) were triggered this past week, but the real story today is the emergence of a significant number of potential monthly chart sell signals that are unfolding right now. With five trading days left in March, preliminary monthly chart sell signals have been triggered in the following stocks, indexes, and ETF's: Russell 2000 Index (see chart below), Philadelphia Bank Index (BKX), Dow Jones Transportation Average (see chart below), BAC, C, COF, CSX, GM, GS, IWM, IYT, JPM, KEY, LUV, MS, PRU, USB, & WFC. 

If there is no meaningful rally in the prices for the above listed vehicles, then these monthly chart sell signals will become official. If there is a rally, then some or all of these preliminary sell signals could be aborted. However, the more interesting picture here for me is the fact that EVERY major U.S. stock market index is currently in "trigger" mode for a potential sell signal on the monthly charts within my computer trading program for the month of March 2017! If there is a meaningful decline in U.S. stock prices next week, very rare (and very reliable) monthly chart sell signals in major indexes like the Nasdaq Composite, the S&P 500, and the NY Composite will be triggered!!

In the interest of full disclosure, I am short the Russell 2000 and the S&P 500 using my favorite double-short trading ETF's, the TWM's and the SDS's.

For you review, I have included two monthly charts below. Both reflect all the buy and sell signals generated by my computer trading system.

Dow Jones Transportation Average Monthly Chart

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

Do Valuations Matter?

In my long career as a passionate follower and participant in the financial markets, technical analysis has always been the driver of my trading and investment decisions. However, every once in a while, the fundamental picture is so clear and compelling that investment action is justified and even demanded.

This may be one of those times! The chart below is borrowed from John Hussman's latest weekly commentary. Mr. Hussman is President of the Hussman Investment Trust and Chief Investment Officer of the Hussman Funds.

This chart represents the Median Price to Revenue Ratio of the S&P 500 Index Components. This ratio is now approximately 40% above the "extreme" level posted at the 2007 stock market peak and about 50% above the overvaluation level posted near the 2000 peak. Historically low interest rates and improved corporate profit margins may explain part of this price expansion, but given the current valuation level in this metric, the bullish case for U.S. stocks from here looks questionable (at best).

While I consider myself a strong student of history when it comes to extraordinary price moves in the financial markets, I've struggled with the rational that is needed now to participate on the long side of this stock market. And despite the fact that my computer trading system has YET to trigger a sell signal, I now have a substantial short position in the S&P 500 and in the Russell 2000 Indexes. 

Bottom Line: While I think the current environment is top-heavy with potential risks for stock investors, even without a black swan event, the fact that the U.S. Federal Reserve is now forecasting a faster track for interest rate hikes this year (a March hike now looks likely to me) should be enough to contribute to a serious stock market correction over the very near term. 

S&P 500 Index with 3-Standard Deviation Bollinger Bands

Russell 2000 Index with 3-Standard Deviation Bollinger Bands