The current bull market is in its ninth year, but Money Morning Liquidity Specialist Lee Adler’s newest stock market prediction shows that we are now in its final stages. In fact, he sees the S&P 500 hitting its final high sometime in the first quarter of 2018.
As December unfolds, we’ve seen a breakout in stocks, and Adler’s technical analysis bumped up his long-term price target on the S&P 500 to 2,800. That’s based on his work with market cycles and published in his Wall Street Examiner Pro Trader Market Updates each week. Simply put, by rising above 2,630, the market’s character changed for the better, suggesting one more leg higher.
However, December looks like the last chance to ride the current bull markethigher before conditions change and a bear market becomes likely…
Stock Market Prediction: Expect a Market Top in Q1
Pundits considered the U.S. Federal Reserve’s quantitative easing (QE) program as the punch bowl keeping the recovery party going and goosing the economy and the stock market for several years.
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However, as Adler has been warning, things will change in 2018…
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And it already has, now that the Fed’s bond purchases are over. Plus, we’ve already seen the first of several planned hikes in short-term interest rates.
So far, it has not made much of a dent.
However, the forces of monetary policy and liquidity will be hostile to the markets in 2018. The Fed’s program, which it calls “normalization,” is designed to reduce the size of its balance sheet.
That program literally takes money out of the banking system. It means the Fed’s primary dealers will have less cash available to buy stocks and bonds.
At the same time, the supply of stocks and bonds will constantly increase. Governments around the world will continue to issue bonds to finance their deficit spending. And corporations are unlikely to buy much more of their own stock back at current sky-high valuations. They may even try to sell shares to take advantage of those valuations.
Basically, there will be less money – i.e., less demand – to buy stocks and bonds, but an ever-increasing supply. As they teach in economics class, that in turn pressures the prices of these financial assets.
It can only get worse later in 2018, as the Fed steps up its plans. In fact, Fed Chief Janet Yellen specifically said that the program to reduce the size of the Fed’s balance sheet is on autopilot.
The key to stock market gains is liquidity. When it’s gone, so is the bull market.
While Adler does believe a bear market could be looming, this is not the time to panic. In fact, some changes to your portfolio can perfectly position you to profit from a pullback in 2018…
How to Protect Your Money, and Profit, in 2018
First of all, there is no need to panic. That cannot be stressed enough.
The initial impact of the Fed’s draining operations will be small and only begin to hit the system later in December. The more dramatic effect won’t come until it doubles the size of the drains in January, and then increases them again in April, July, and October of next year. Even those impacts should have a 30- to 60-day lag from implementation.
In the meantime, the speculative juices are still flowing for stocks. We’ve seen evidence of the use of increased leverage and increased borrowing in recent weeks. Clearly, this is not value investing in a cheap market. Rather, it seems to be a speculative blow-off.
Just look at the market’s reaction to the possibility that tax reform will get done in Washington. How many times can it rally on this same hope? Regardless, the pace of the gains increased dramatically, and that is worrisome in a bull market that has already raged higher since the election last year.
Basically, the mood is still positive right now, and the liquidity is still flowing, but that will change next year, slowly at first, but with increasing intensity.
So, if you are comfortable with all these cross currents, you can hold your current stock positions for now. Wait until there is clear evidence that this euphoria has reversed.
At that point, it will be time to methodically start to raise a cash. Adler’s target is to reach 60% to 70% cash by the end of January, or the end of the first quarter at the latest. Your cash target could be more or less, depending on your personal circumstances.
Adler will also advise on specific stocks or sectors that appear set up for swing trades to the short side to give readers the chance to actually profit from the market’s bearish change. He will keep readers updated every step of the way.
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Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases I receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.