Will May 25th Mark The High In The S&P 500 Index For All of 2017?

Even the most steadfast bear has to be impressed with the U.S. stock market action since Election Day last November and especially over the last six trading days! Can anything stop this incredible bull market?

While it goes without saying that there will be a correction at one point (very soon), it's probably also safe to say that almost every bearish ETF trader has been run over several times this year ahead of today's record high close in both the Nasdaq Composite Index and the S&P 500 Index. 

Minor bearish technical non-confirmations were posted today in the NY Composite Index, Dow Jones Industrial Average, Dow Jones Transportation Average, and the Russell 2000 Index, which all failed to post all-time highs with the Nasdaq Composite and the S&P 500. However, only the under-performance in the Russell 2000 looks important in terms of forecasting a potential near-term top in the overall market. 

In the interest of full disclosure, I remain short in both the S&P 500 Index and the Russell 2000 Index. The under-performance of the Russell 2000 has helped to contain the losses in my managed accounts, but there's not much comfort there.

Any bears still willing to execute short positions might find some ammunition in the fact that meaningful downturns in the U.S. stock market started in late May of 2001 and late May of 2008. While seasonal research has never been my strong suit, I like this particular negative bias in terms of partial justification of my short positions. 

Of course, to really justify a short position here all you need to do is hang your hat on the recent comments from the U.S. Federal Reserve as published yesterday in the minutes that were released from the early May FOMC meeting. Buried in the tail end of a 12-page release was a potentially meaningful comment about "normalizing" the Fed's Balance Sheet by allowing maturing bonds to come due without the usual reinvestment. According to research from JP Morgan today, this normalization process could begin as early as September 2017. Could there be a "taper tantrum" in response to this potential tightening action by the Federal Reserve? Probably! If so, when will investors begin to sell stocks in earnest?

Crude oil prices were down about 5% today! Should stock investors view this extraordinary collapse as a potential signal that the so-called "reflation trade" is ending? Probably!

The Emperor Has No Clothes

"I truly believe that the first 100 days of my Administration has been just about the most successful in our country's history," President Donald Trump said in his weekly address on Friday (April 28th), a day ahead of the closely watched 100-day milestone. 

If the U.S. stock market is used as the gauge for measuring President Trump's "success" in his first 100 days of office, then the above comment is completely accurate. Wall Street investors certainly believe the rosy business scenarios coming out of the White House and NO ONE can argue this point. The International Center for Finance at Yale School of Management regularly surveys retail and institutional investors for their views on current valuations and one-year-ahead expected returns. In its latest survey, 99% of those surveyed now believe that U.S. stock prices will be higher in one year's time. 99% ! Wow !!

In the interest of full disclosure, I am not included among this 99% group. In fact, as part of the 1% who are "non-believers", I am significantly short both the S&P 500 Index and the Russell 2000 Index. Here are just a few noteworthy negatives facing U.S. stock prices immediately ahead:

1. Since 1950, U.S. stock prices have advanced approximately 7.5% on average during the period November 1st through April 30th. From May 1st through October 31st, the average gain is just 0.3%! (Negative seasonal bias: "Sell in May and go away!")

2. The latest monthly NYSE Margin Debt report (for March 2017) revealed a record $536.9 billion in customer borrowing to buy stocks, up more than $91 billion over the last 12 months. If a stock market correction does begin in earnest, it won't take long for those who have bought stocks on margin to seriously consider exiting their positions. This exodus from the margin buyers will then accelerate the overall price decline in most major stock market indexes.

3. The Trump Administration's much anticipated "Tax Reform" package was introduced last week, and it's a complete non-starter (and has no chance of passing in either the House or the Senate). While Trump spoke the truth when he declared that a "massive tax cut" proposal would be forthcoming, the package that was presented last week was just a "massive" tax cut for the wealthy that early projections strongly suggest will inflate the National Debt by as much as $7 trillion (or 35%) over the next 10 years. While there may be a minor cut in corporate income taxes during President Trump's term in office, no significant tax reform legislation can be expected this year, and maybe not even next year!
4. According to Bloomberg, total loans at the 15 largest U.S. regional banks declined by about $10 billion to $1.73 trillion in the first quarter, compared with the previous three-month period, the first drop in four years! All but two of those banks missed analysts’ estimates for total loans, as a slump in commercial and industrial lending directly impacted results. Is it possible that bank lending standards are tightening? Yes indeed!

5. The cold winds of economic recession are already being felt nationwide and globally. Gross Domestic Product grew by just 0.7% in the first quarter this year (as announced yesterday, Friday, April 28th), and expected continued central bank tightening in the U.S. and China, already underway, will stymie any significant economic growth for the rest of this year and maybe even into next year (despite optimistic forecasts to the contrary).

6. A daily chart sell signal was triggered by my computer trading system this past Friday, April 28th, in the Nasdaq Composite Index (which traded above 6,000 for the first time in history last week). See chart below.

7. After posting a record high last week, the Russell 2000 Index fell sharply (-1.18%) on Friday, April 28th. This closely watched index of small-cap stocks tends to be a leading indicator for the general market. The Russell 2000 Index is currently trading at 104 times trailing 12-month earnings (according to Birinyi Associates), an unsustainable level of valuation.
8. The Dow Jones Transportation Average, often another excellent leading indicator, is already down 5.62% from its record high posted on March 1, 2017. Please see DJTA Weekly Chart below (with multiple computer-generated sell signals reflected).

Bottom line: A major stock market correction in the U.S. looms immediately ahead. The S&P 500 Index and the Nasdaq Composite are both projected to lose at least 20% over the next 6 months, and the Russell 2000 Index is projected to sustain an even greater loss over the same time period.

Nasdaq Composite Index Daily Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index ETF (symbol IWM) Daily Chart

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

Dow Jones Transportation Average Weekly Chart with Computer-generated Buy & Sell Signals

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