When you see the pattern of price action going into the Presidential Election, you can see a pattern of massive selling. The "Range Expansion Declines" are highlighted in YELLOW TRIANGLES on the chart to show you when there are movements in the market DOWN by an amount GREATER THAN THE PREVIOUS MONTH'S RANGE.
What you can see here is that there is a major power shift that seems to happen and a period of "de-risking" when there are concerns that the leading party will shift power.
How can you use this to predict? If you see massive monthly "range expansion" moves down, there is a good chance the party in power will shift to the other party. You can see that Obama's 2nd term in 2012 looked like it would shift to Romney, but it didn't.
(This is a similar chart to the one I posted before the election where I pointed out that people had already sold and therefore was support. Being "trapped" means being either in cash or short for a market advance.
Cheers,
Tim
11:37AM EST Friday November 18, 2016
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stantrader
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So what are the implications going forward? Trump won.
timwest
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@stantrader, Since the selling already happened, the process next is to bring those who are on the sidelines and who are short the market to cover. Based on this rationale, the bottom is in place and we can either grind higher from here or you continue to buy sharp spikes down which brings "panic", "crash" and "armageddon" forecasts back very quickly. If corporate tax rates are cut, that could provide the impetus for shorts to cover and for cash-on-the-sidelines buyers to get back into the market. Does that make sense?
stantrader
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@timwest, Thanks! Do you take into consideration the market valuation? By most metrics (PE ratio/Shiller PE/Total market cap to GDP ratio) we are highly valued. At valuations close to 2000/2008 levels
@stantrader, The cash buyers have a rough time justifying any purchases at current levels due to valuation concerns. This is why I forecast sideways to deal with frustrating everyone. Any bulls and bears will be frustrated. I see vocal bears all over the media airwaves, cable tv and the internet, along with billionaires by the handfull, but you need sellers to drive down prices. Fake breakouts and sharp-quick selloffs are the earmarks of sideways to higher markets. Valuations are high but nothing even close to 2000 in the internet stocks or 2015 in private equity. Does that answer address your question to some degree? Quick question: Have you seen my other forecasts?
timwest
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@stantrader, Look at "Relative" valuation - Dividend yields vs Treasury Yields (after tax). Look at profit margins. Look at free cash flow yields. Look at corporate debt levels relative to earnings. Look at earnings growth vs inflation over the past 10 years. For every bear metric you can find there is a bullish metric. Global competition by way of the internet creates massive competition and keeps inflation low, which keeps central banks from tightening. Schiller's work uses 10-year averages, so keep that in mind. Earnings are an accounting calculation, but taxes paid and sales are much harder to manipulate and fake. Track corporate taxes paid (after adjusting for fewer US companies since many have left the US) to get an idea how well corporations are doing. I'm a bit of a neutralist here whereas in 2007 I was forecasting a 1973-1974 equivalent decline was ahead. The similarities back then were uncanny. And now? Closer to 1979-1980, I believe.
stantrader
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@timwest, thanks for the great comments! And you have great points. I am not a bear. I just believe that the current valuations are very rich and that a meaning pull-back of 10% is due. Mainly to realign valuations. Your concerns are dead on with each metric. Also, your comment on how there is a bull case for every bear case is spot on. Reminds me of the Shakespeare quote, "the devil can site scripture for his purpose." I just feel like at these levels, and given the grand optimism of the Trump election priced into the equity markets, prices should correct. Add on the dramatic rise in interest rates over the last week, an the sell off in emerging markets, it seems like US equities may be over extended. And I am also shocked by the lack of conviction of the S&P 500 to plow through 2200, where as both the NASDAQ and the Dow have reached new highs. Sees like the conviction is waning. And as we have learned anything about this year is that it is unprecedented. Thanks for the open discussion. Appreciate your input you definitely seem like you know what you are doing.
timwest
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@stantrader, The rally so far has been short covering. I don't think the stock market has to drop 10% from here, but I would view 4%-5% corrections as the more likely sized corrections. There are a number of historical parallels we are running along and generally speaking we should have had a big decline after Obama raised tax rates dramatically. So, the market is able to "Take Punches" quite well and stand on its feet. With talk about lowering tax rates to make the US more attractive to foreign investment and to return "accounting profits held overseas that are invested in Gov't T-Bonds, Notes and BIlls". The most bullish thing you can see after a long drought of capital investment is to see rates rise. That means investors are putting their money to work. They are selling their safe-haven investments in order to make "real productive investments". The history of interest rates is very counter-intuitive. If rates fall, inflation falls. If rates rise a bit, it is bullish for asset prices. If rates get way ahead of inflation, then it is bearish for asset prices. With the inflation rate being calculated in such an unusual manner in the past 10 years with all of the substitution and hedonistic adjustments, it has wrung out most inflation, but it also has hurt savers and retirees in a major way and forced steady spending reductions over the past decade. As for other patterns in place: The "New Fed Chairman" pattern is right on track, especially. It's interesting that seems to be a useful construct. I make a bull-bear list of factors from short term to long term, which I'll find and post the link shortly. I haven't updated it in about a year. Let me get to work on it. I haven't had to update it frankly because sentiment is the lowest it has been in my 30+ years of investing, which means this is probably the lowest risk time to invest. It may not be the "highest return" time to invest, but low sentiment means low downside risk going forward. Very low risk of downside.