2018 Preview

I’ve been consistently bullish for the past 18 months and written about it several times on this blog. Here are the highlights:

1) In April 2016, when the Dow was 17,500, I made a call for Dow 20,000 by the end of 2016 for the following reasons: Psychology, Market Resilience, Improving Breadth, and the Fed.
2) In July 2016, after the Brexit event, I wrote that we were starting a NEW Bull Market.
3) In September 2016, I wrote that the market was predicting a Trump Victory.
4) On election night, when Trump won and the Dow futures were down -700 points, I wrote that this was “a tremendous buying opportunity.”
5) At the end of 2016, I appeared on Fox Business and said we would see “at least another +10% gain” in 2017.
6) In April 2017, I wrote that the markets were providing a rare, generational opportunity.
7) In November 2017, I wrote about “The Perfect Storm” that was continuing to line up for investors: Technicals, Fundamentals, Global Growth, Interest Rates, Sentiment, Pro-business Government, and a Technological Revolution.

I’m not mentioning all these points to brag, but rather to stress one factor: Tape Reading. I think I’ve been right on the markets for a while now because I watch the tape all day and try to pick up on the subtleties and nuances of the market’s character. Tape reading is an art. Most people don’t have the time to do it or even know what to look for, but it is the major reason that has led me to these calls. For example, the number one thing I continue to see is incredible resilience. Think of everything that’s been thrown at this market over the past few years: geopolitical concerns, dramatic elections, viruses, Brexit, terrorist attacks, etc. and guess what? The market has been INCREDIBLY resilient and literally brushes off any bad news. Now imagine if the news actually turns positive??? So far, it has. The recently passed tax reform bill could add $10-$15 in S&P earnings over the next year. In addition, continued progress in infrastructure, repatriation, and the overall technological revolution could move GDP growth from 1-2% to 3-4%.

Besides resilience, another major thing I’ve noticed recently is the broad participation. Unlike October of 2007 when the market was being driven higher by three stocks, the current market is being lead by many sectors. In other words, it’s not just the FANG stocks that are leading this market. We continue to see participation from Technology, Healthcare, Housing, Materials, Chemicals, Software, Gaming, Biotech, and even Energy.

Another fascinating part of tape reading is there are times when the market is due for a pullback or gives the feeling that a correction may be coming. What’s amazing is that every time I get this feeling, the market never corrects and continues to be resilient. When this happens, I’ve noticed historically that the market usually resolves itself to the upside. I don’t have a particular target or percentage gain in mind for 2018, but I feel we will continue to “melt up” and surprise to the upside.

Many people are expecting increased volatility in 2018. I think it will happen but from higher prices. For example, we could continue to grind higher into March/April and then see a pullback to set us up for a strong fourth quarter. As I’ve said many times in my writing, this move higher will not be easy. The market is not designed to just give money away. There will be corrections, shakeouts and pullbacks along the way. One concern I have is that many people are jumping on the bullish bandwagon, but this could also help drive the market higher. Either way, I am confident that when the real institutional selling shows up, it will appear in the tape.

I’ve made many parallels that 2016-2021 could be similar to 1995-2000 but remember that there were big corrections along the way in 1997 and 1998 and another VERY convincing correction in Sept/Oct 1999 right before one of the most amazing six-month runs in market history! The biggest challenge will be navigating through this. It will require a good balance of taking profits along the way up and having conviction during the corrections. As long as all those “Perfect Storm” factors continue to line up for investors, I see 2018 being a strong, positive year but with more volatility along the way. Good luck trading!

I can be reached at: jfahmy@zorcapital.com.

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