Did you know that a year ago, not one of the 18 top Wall Street strategists expected the S&P 500 Index of the biggest U.S. stocks to rise as much as it did in 2017?
For 2018, the consensus forecast (of 10 investment strategists surveyed by Barron’s) calls for a 7% gain in the S&P 500 SPX, +0.40%
That’s somewhat similar to last year, and about as run of the mill as it gets. Strategists’ forecasts usually cluster around the historic average return.
Most analysts’ forecasts are either cookie cutter or sensationalistic — they either blend in or get shock-value attention.
Here is an outside-the-box outlook for 2018, based simply on common sense and time-tested indicators.
Investor sentiment
Ever since the 2009 stock-market low, there’s been a fascinating movement related to crowd-psychology-based indicators. Every time a bullish sentiment extreme popped up, the (social) media pointed out how bearish this is for stocks.
The excessive amount that crash prophets focused on “bad” news turned contrarian indicators into double-contrarian indicators. (Like a double negative, this is actually positive for stocks.)
The Profit Radar Report has been writing about this unique movement for years, and persistently concluded that investors are not bullish enough for stocks to tank.
For the first time in years, we are now seeing the kind of sentiment readings that actually can become a headwind for stocks. (See chart below for more details.)
Media (and social media) have not yet fully embraced this rally, but perhaps further gains will even get (social) media excited, and set the stage for a larger decline.
Barometers
December/January is a busy time for year-ahead forecasting barometers. There is the Santa Claus Rally (SCR), the First 5 days Indicator (F5I) and the January Barometer (JB). The formula for each barometer is simple: As the indicator goes, so goes the year.
The table below shows each barometer along with failed signals and all the data needed to calculate an accuracy ratio. The individual accuracy ratio is between 63.8%-73.9%.
About a year ago, the Profit Radar Report stated that: “For the first time since 2013, and for the 18th time since 1950, the Santa Claus Rally (SCR), First 5 Days of January (F5J) and January Barometer (JB) were all positive (average return: 18%).”
Based on the composite barometers, there was a 100% chance that 2017 would be an up year (with an average return of 18%). So far for 2018, the SCR is positive.
Elliott Wave theory
Elliott Wave theory (and money flows) correctly indicated that the February 2016 low would be significant, and was to be followed by a strong rally. (See February 2016 article: “Bear market risk is zero based on this rare but consistent pattern.”)
The S&P 500 surpassed our — at the time ridiculous — upside target of 2,500 points, and demolished every other upside target since. One major weakness of Elliott Wave theory is unpredictable wave extensions, such as the current one.
With or without final blow off, this wave 3 (see wave labels on first chart) will end and lead to a choppy pullback (green target zone). Depending on the final wave 3 high, the wave four downside target could be around 2,400.
Money flows
Money flows remain strong, which means that any correction will be only temporary and followed by further gains. (More detail available here.)
Cycles and seasonality
Cycles and seasonality show risk for the first half of 2018.
Conclusion
Risk is rising, and, perhaps after a run to 2,800 points, the S&P 500 is likely to run into some trouble and see the first 10% or so correction in over 10 years. Although this bull market is not yet over, 2018 may enter the history book as a fairly flat year.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.