The Keystone Speculator’s 2017 Predictions
It’s time for another year of predictions and forecasts that will provide comic relief in December 2017. Making predictions one year in advance may seem like a fool’s errand but it is a very important exercise for all traders and analysts to hone their intermediate and long term strategic forecasting abilities. Use the table below as a template to write your own predictions and better yet have a friendly wager with an associate to see who can emerge as the wisest forecaster one year from now.
The Wall Street analysts redeemed themselves in 2016 after the entire lot was dead wrong at forecasting the stock market in 2015. Even in 2016, the stock market was lackluster until the central bankers stepped up the pace in the second half of the year which rewarded everyone that remained blindly long the stock market. Several Wall Street analysts were far too bullish with their estimates last year. Keystone was far too bearish last year which looked genius until March began. The BOE pumped stocks higher after the Brexit vote in late June 2016 which started the second half stock market orgy. Then the ECB is pumping stocks higher with quantitative easing that was extended. The central bankers are the market.
Keystone was very bearish for last year which looked genius for the first two months but the central bankers again prove too powerful. The Federal Reserve forecasted four hikes in 2016 and only pulled off one in the final two weeks of the year with Chair Yellen’s credibility against the wall. Will the central bankers finally run out of gas with the stock market rolling over?
For 2017, Keystone is the only Wall Street Analyst looking for a substantially down stock market. The year should finish negative and may even include a flash crash or regular crash event. Stocks are probably from 20% to 80% overvalued due to eight years of central banker intervention. No one truly knows what any asset is worth anymore due to the multi-year central banker involvement in global markets. The ECB begins tapering in March-April, so barring any further central banker shenanigans, the springtime should represent where the global central banker intervention in markets permanently wanes lower. Without the same amount or more of monthly easy money, stocks will go down. There are huge hopes for more stock market upside with Trump providing an enormous stimulus package as well as lowering taxes and reducing regulations but everyone’s hopes may be a bit lofty and the stock market may have it all priced-in.
The basic theme for 2017 is that the taper in the ECB purchases begins from March to April. The forecast is that stocks will top out between late February and mid-March. A low will occur in April, then a rally higher again to a topping out in late April or early May, and, for the sake of drama, that will mark a multi-year top for stocks (the monthly charts currently hint at this outcome). So stocks will likely sell off in January, then recover in February and top out as mentioned. Think of it as a top now, then a peak between late February and mid-March, then a peak in late April early May and stocks will not see the highs from these peaks for many months, perhaps years. The alternate forecast is for the stock market to simply roll over at anytime and begin trending lower on a long term basis.
Another theme is the 18-year secular stock cycle that should likely finish with a couple down years ahead (more on this below).
The year begins at SPX 2239.
Keystone is expecting a multi-year top to occur in 2017 similar to the May 2015 market top. The only reason that May 2015 was not THE multi-year top is the never-ending central banker intervention and accommodation. Investors will probably begin pricing-into the market in late February and March the realization that the ECB is reducing its monthly QE purchases. QE is the mother’s milk of stock prices. Global central bankers including the Fed, BOJ, BOE and ECB are running out of bullets. A wild card is how much juice China’s PBOC can add to the stock market.
Keystone is calling a multi-year top in stocks this year. The SPX monthly chart is in negative divergence over the last two years but there is some near-term juice remaining after the late-2016 ECB QE extension and Trump victory pumps. Thus, a jog move would be expected on the monthly basis to begin the year (down-up-down). Keystone says a multi-year top will be placed in the stock market this year and these prices will not be seen again for several years.
When stocks come off one of the tops described above for early 2017, dip-buyers will loyally jump in and buy but stocks will continue to stumble lower. This will create panic and fear that the central bankers have finally run out of gas. Once trust, confidence and credibility in the Fed is lost, all is lost. When buying the dips is viewed as running into a buzzsaw, full-scale large block selling will occur in the stock market. The wealthy, that have raped the system for all its worth over the last eight years gaining huge profits from the Fed’s and other central bankers Keynesian policies, will lock in profits. They did not get wealthy by riding stock markets lower. They will take their chips off the table. Average Americans that got caught up in the stock market hype after the Trump election will be left holding the bag like 2007-2009.
Keystone continues to forecast an ongoing disinflationary and deflationary scenario around the world which is extremely counter to the universal expectation that inflation increases from here forward. The media already labels the future as the ‘great reflation’. The US has been in a disinflationary and deflationary funk since 2012. The commodities and goods deflation is rampant; however, the services sector (college tuition, utility bills, insurance bills, house prices) is not yet rolling over into deflation. In 2017, house prices will retreat as the housing market stumbles. The deflationary and disinflationary funk will likely continue for a year or two longer, much to the consternation of Wall Street analysts, with inflation kicking in perhaps in 2018-2020 then hyperinflation in the early 2020’s (which will be a whole new set of problems). Traders will be frustrated this year at not seeing the inflation and far higher rates occur that everyone else is now forecasting.
It is likely very prudent to exit long stocks that you are not willing to hold for a few years. Do not let media commentators goad you into staying in the stock market. The smart folks this year are likely the ones moving assets into cash and willing to wait things out for a few weeks or months or even a year or so to see what happens. 2017 may be a year where traders are picking up nickels in front of a bulldozer.
NOTE: Do not confuse Keystone’s predictions and prognostications with actual trading positions. Keystone highlights short-term trades in the blog and the status of the Keybot the Quant algorithm, that controls 65% of Keystone’s portfolio, is constantly displayed in the left margin. Reference Keybot the Quant’s status if you ever want to know whether the stock market is currently in a bull or bear market pattern. The portfolio weighting numbers in the left margin provides insight into Keystone’s overall status on the market (bull, bear, neutral) based on the actual dollar amounts invested. Keystone adjusts positions in the market very quickly. If you cannot perform adjustments quickly, it may be prudent to reduce long exposure to stocks in 2017. A flash crash is potentially on the table and will provide no warning and, most importantly, may not quickly recover as in prior flash crashes. Without further adieu, Keystone provides the following 180 predictions for 2017.
The Keystone Speculator’s 2017 Predictions
SPX High for 2017: 2283 (if this is breached 2328)
SPX Closing Price for 2017 (SPX Begins at 2239): 1900
SPX Low for 2017: 1810
[The current price at 2239 reflects S&P 500 earnings at say, $120 with a PE of 18.7 or $118 at 19.0. Earnings average about $118 in 2016. For 2017, the Wall Street consensus is expecting earnings at $132 in 2017 which would target the SPX 2468-2508 range. The 2007 stock market top occurred with a 20.3 PE and the 2000 top with a 26.2 PE. The current 19-ish PE is misleading since the RUT small caps are well above a 20 PE for the last few years and the 19 is an artificially lower number due to the obscene and aggressive stock repurchase programs over the last four years. Using a 30% or more correlation for the buybacks, the current PE would be more in the 21-26 range if the ongoing buyback orgy never occurred. Bob Shiller’s Cape PE is 28.3 consistent with prior major market tops (its historical average over 130 years is 16.7). Keystone puts on a bear suit for this year (see the comments on the 18-year secular bear cycle below) and forecasts far lower numbers than the consensus. Keystone projects earnings to drop in the second half of the year, perhaps quite dramatically due to recession, to $110 and $100, far lower than anyone expects. For the year, the average earnings are forecasted at $110 so with the 18.7 multiple a 2057 target is calculated. At $100, where the year may end, that would place the SPX at 1870-1900.]
Dow Industrials Range in 2017 (INDU starts at 19764): 15400-20230
Dow Industrials Closing Price for 2017 (INDU): 16000
Nasdaq Composite Range (COMPQ starts at 5383): 4200-5580
Nasdaq Composite Closing Price (COMPQ): 4550
Russell 2000 Industrials Range (RUT starts at 1358): 950-1428
Russell 2000 Industrials Closing Price (RUT): 1050
Dollar Range (USD starts at 102.25): 87-103
Dollar Closing Price (USD): 90
Dollar/Yen Range (USDJPY starts at 117): 100-122
Dollar/Yen Closing Price (USDJPY): 111
Euro Range (XEU starts at 1.085): 1.03-1.15
Euro Closing Price (XEU): 1.13
2-Year Note Yield Range (UST2Y starts at 1.21%): 0.6%-1.6%
2-Year Note Closing Yield (UST2Y): 1.00%
5-Year Note Yield Range (UST5Y starts at 1.76%): 1.15%-2.40%
5-Year Note Closing Yield (UST5Y): 1.75%
10-Year Note Yield Range (TNX starts at 2.46%): 1.6%-3.0%
10-Year Note Closing Yield (TNX): 2.0%
30-Year Note Yield Range (TYX starts at 3.06%): 2.25%-3.30%
30-Year Note Closing Yield (TYX): 2.65%
Will the Yield Curve Invert? No, but the flattening behavior continues. Stocks can fall into a bear market without an inverted yield curve as they did in five notable periods; early 1962, 1976-1978, 1987 into the crash, 1998 and 2011.
2-10 Spread at End of Year (Starts at 125 basis points): 100-ish (2.0% minus 1.00%)
Unemployment Rate % Range (4.8% at start of year): 4.7%-5.6%
Unemployment Rate % December 2016: 5.1%
Will Any Monthly Jobs Report During 2017 Be Under 200K Jobs? How Many if Yes? Yes, nine.
Will Wage Inflation Appear in 2017? No, wages will stay flat at about 3% per year, without wage inflation, the Federal Reserve cannot succeed at creating inflation.
GDP Average during 2017: 2.0%
WTIC Oil Range (WTIC starts at 53.87): 28-58
WTIC Oil Closing Price (WTIC): 42
Brent Oil Range (BRENT starts at 56.94): 28-62
Brent Oil Closing Price (BRENT): 43.60
Natty Gas Range (NATGAS starts at 3.73): 2.00-4.00
Natty Gas Closing Price (NATGAS): 2.70
Gold Range (GOLD starts at 1151): 720-1280
Gold Closing Price (GOLD): 975
Silver Range (SILVER starts at 16): 9.80-21.5
Silver Closing Price (SILVER): 12.20
Copper Range (COPPER starts at 2.51): 1.40-3.20
Copper Closing Price (COPPER): 1.80
Commodities Range (CRB starts at 192.55): 120-220
Commodities Closing Price (CRB): 170
China Growth Rate % Average for 2017 above or below +6.5%?: Below
BDI (Baltic Dry Index starts at 960) Range: 420-2200
BDI at end of 2017: 1400
Technology Sector (XLK starts at 48.37) Higher or Lower in 2017? Lower
Semiconductors Sector (SOX starts at 906) Higher or Lower in 2017? Lower
Semiconductors Sector (XSD starts at 56.10) Higher or Lower in 2017? Lower
Biotech Sector (IBB starts at 265) Higher or Lower in 2017? Lower
Financials Sector (XLF starts at 23.27) Higher or Lower in 2017? Lower
Health Care Sector (XLV starts at 68.92) Higher or Lower in 2017? Lower
Retail Sector (RTH starts at 75.80) Higher or Lower in 2017? Lower
Retail Sector (XRT starts at 44.04) Higher or Lower in 2017? Lower
Consumer Discretionary Sector (XLY starts at 81.46) Higher or Lower in 2017? Lower
Consumer Staples Sector (XLP starts at 51.75) Higher or Lower in 2017? Lower
Energy Sector (XLE starts at 75.30) Higher or Lower in 2017? Lower
Industrials Sector (XLI starts at 62.19) Higher or Lower in 2017? Lower
Materials Sector (XLB starts at 49.70) Higher or Lower in 2017? Lower
Utilities Sector (UTIL starts at 659) Higher or Lower in 2017? Lower
Utilities Sector (XLU starts at 48.58) Higher or Lower in 2017? Lower
Telecom Sector (IYZ starts at 34.48) Higher or Lower in 2017? Lower
Transportation Sector (TRAN starts at 9052) Higher or Lower in 2017? Lower
Transportation Sector (IYT starts at 163) Higher or Lower in 2017? Lower
Homebuilders (XHB starts at 33.86) Higher or Lower in 2017? Lower
Real Estate Sector (XLRE starts at 30.79) Higher or Lower in 2017? Lower
The 18-year cycle is the most reliable stock cycle and is currently in a secular bear from 2000 to 2018. Dramatic cyclical rallies are very common in the secular bears such as 2003-2007 and from March 2009 to present. Since only a couple of years remain in the secular bear cycle and stocks continue to rally, the next couple years, 2017 and 2018, have to have a downward bias. For 2017, let’s go with a down year for the stock market. The secular bear cycle should finish with negativity. Then the secular bull 18-year cycle begins from 2018-2036 with hyperinflation a future problem likely kicking in after 2019.
A long overdue recession is expected to begin in 2017.
The buyback activity fades in 2017.
M&A activity will continue but at a far slower pace this year.
Earnings will remain challenged and noticeably decrease this year especially in the back half contrary to the universal consensus that says earnings will run to the lofty 132-140 area..
Top line revenue numbers for companies will remain challenged (flat or lower).
There remains a great overcapacity of commodities and goods around the world. The lack of demand for products will stifle economic activity and disappoint those looking for a recovery.
As described above, the US markets should top out with a significant top in the January-May time frame and this will include the major European indexes (DAX, CAC, FTSE, etc..) and Japan (NIKK). These global indexes will all top out together because the eight-year global central banker joy ride is over.
Global bond yields, Treasury yields, currencies including the euro, dollar/yen and US dollar index, and commodities including gold, silver, copper and oil are going to move much more sideways than anyone expects frustrating bulls and bears alike in these asset class. Commodities will remain subdued in a lingering global deflationary environment.
Wage inflation disappoints in the US. Wages will remain flat at the 3% annual rate disappointing the Fed. Inflation, which the Federal Reserve has tried to create for eight years with money printing, cannot exist without wages increasing. At the end of 2016, wages were +2.9% annually and will not make much headway higher. This will disappoint the Fed and market participants.
Another theme this year is the lack of ‘velocity of money’. This has prevented inflation from occurring despite the central bankers printing money for eight years. The money sits at the banks and companies are only willing to use cash for buybacks and divvy’s which serve to pump stock prices higher and make the wealthy richer. The velocity of money, the multiplier effect, will not kick in which means inflation is not yet here. Inflation is projected to become an issue more in the 2018-2010 time frame.
The biggest parlor game this year is guessing how many times the Federal Reserve will hike rates. The Fed is at three hikes. In 2016, the Fed projected four hikes only to implement one. The bond market is indicating perhaps two hikes. Keystone is expecting a recession so the rate hike talk will quickly fade. The forecast is for no rate hikes this year. The Fed will hold off in the spring in March and after that it will be obvious that a hike will not occur as the economy stumbles and a recession looms.
The Federal Reserve will return to the ZIRP policy late in the year due to a weakening economy causing a loss in Fed credibility. The consensus will grow into yearend that 2018 will be a lousy year creating more doom and gloom.
A major breakdown may occur for the stock market on 1/18/17 or 3/18/17 give or take a week or two on each side of each date.
A major breakdown may occur for the stock market on 7/14/17 or 9/14/17 give or take a week or two on each side of each date.
Social internet reaches a peaking phase as many people realize they are wasting their lives trying to impress a bunch of strangers.
The currency wars will increase. Capital outflows will continue from China as the yuan weakens. China’s economy is in serious trouble and will perform a faceplant this year.
China will finally receive the long-awaited financial crisis due to a decade of overbuilding. The shadow banking system in China will unravel in a similar pattern as the 2008-2009 US financial crisis.
The US will expand ties and business with India but the BSE and Nifty indexes will trend sideways to sideways lower and end the year negative.
Protectionism will increase as the slowing global economy causes countries to continue slitting each other’s throats. Tariffs are increasing in solar, steel and wine sectors and will spill over into many other sectors and industries as each nation attempts to protect their own industries. The result is like the Great Depression in the 1930’s where everyone drags each other down the rabbit hole. The deflation and disinflationary environment continues despite everyone guaranteeing inflation at the start of the year.
A cyber attack will occur on a financial institution or major retailer that is not rectified quickly in a day or three. Instead, the cyber attack will create a mess that disrupts the company from conducting business for many days or weeks. The incident will create fear and panic about the safety of the internet and cloud.
Student loan debt problems will surface and a realization hits that the US has a new and serious problem.
Ditto car loans that are the new subprime fiasco.
Social unrest will increase in America. The common folks will rise up in revolt realizing they were sold down the river by the Fed. The distrust in US authority will increase dramatically and the split between the social classes (rich versus poor) will widen even farther. The spread between rich and poor in America is at the widest in 50 years. The Federal Reserve has made the wealthy filthy rich and created the huge wealth gap that will breed social unrest. The social unrest, animosity and violence will be exacerbated by the economy weakening.
Attacks on the wealthy population will increase both physically and property-wise. Expensive cars will be keyed with more frequency and tires slashed. Spray painting graffiti on mansions will become more common. The rich will begin seeking gated communities for safety as the separation between rich and poor increases in America and social protests become more violent.
As the stock market is weak and company layoffs increase in 2016, CEO’s will become targets of mob mentality with protestors showing up at their residential houses reminiscent of the days of pitchforks and torches. The wealthy will have to seek neighborhood communities with security guards and gated communities. CEO’s and other corporate executives will become very worried about their safety.
A cash society will increase in the US. The one-half of America that were abandoned by the Federal Reserve in favor of making the other one-half of America that own stocks wealthy will stretch their family budgets by avoiding paying taxes in every way possible. More people will work “under the table” for cash which will cut the Federal, state and local governments out of tax revenue. Products and services will be exchanged for cash so taxes will not have to be paid. When the economy turns south and folks lose their jobs, the government tax bases will be hit had with a double whammy; less revenue from folks out of work and less revenue due to a cash society increasing. Many communities that continue to spend obscene amounts of money on technology and other gadgets and militarization equipment for their local communities will quickly fall into financial trouble. When an economy falters, things can go downhill very fast.
Congress will begin discussions to implement a cashless-society in the United States. Lawmakers know that people will be working under the table more and dealing in cash to avoid paying taxes so the politicians will try to get legislation in place before the use of cash becomes prevalent again. The general public will be disagreeable to a cash-less society approach for America.
More and more heinous acts including murder will be recorded on smartphones as they occur and immediately posted on social internet platforms such as FB. The sick behavior of showing these acts in real-time only serves to encourage other sicko’s to do the same thing. Society becomes sicker each day.
A geologic event involving plate movements or winds will occur which creates a huge tsunami wave event that lands ashore of a coastal nation. The vertical height of the wall of water will shock people on how such a large wave could even be possible. Concern grows for coastal cities on how to protect against rogue waves.
One or two major geopolitical event/s such as war, terrorism, and/or a pandemic will occur this year. The timing would align with a stock market selloff. The event will be blamed and cited as the reason for the stock market selloff just like in 2001 when 9-11 was blamed for the stock market drop when in fact the economy and underpinnings of the stock market were far weaker than touted at the time. The war or other event will be blamed for the selloff as a means to protect the Federal Reserve. This may occur in the January-May time frame. The Fed will not be blamed for a sick economy and falling markets even though they are at fault. This is why Greenspan, Bernanke and Yellen are never concerned and remain relaxed and calm at all times; they know how the inside baseball game is played and they will always be protected and never be blamed. Instead, the major negative events will be blamed for the downfall of the economy and markets.
Here are some of Keystone’s individual stock picks for 2017 with the prices at the start of the year. 11 long ideas and 10 short plays. If the markets are as weak as Keystone expects, almost any stock on the long side would not be attractive while short plays should be in vogue all year long. It will be an interesting list to watch this year; the prices can be assessed at the end of the year. As always, do not invest in any of these picks unless you want to lose your money; always ask your financial advisor for guidance before placing any trade.
MGPHF 0.94 (penny stock; graphene)
DBA 19.97 (ag)
JJG 28.16 (grains)
JO 19.55 (coffee)
SSG 21.46 (sugar)
TWTR 16.27 (social internet; real-time news feed)
ILMN 127.65 (genetics; Grail cancer detection)
MBLY 38.23 (chips and tech for autos)
CMG 376.82 (burrito restaurant)
NVGS 9.33 (propane; portable gas units; Wilbur Ross)
HDGE 9.25 (bear ETF)
AAPL short from 119 and higher (tech)
FB short from 128 and higher (social internet)
TSLA short from 250 and higher (electric cars)
AMZN short from 820 and higher (online retailer)
NFLX short from 129 and higher (media)
GOOGL short from 826 and higher (tech)
JNK short from 36 and higher (high-yield)
HYG short from 87 and higher (high-yeld)
SDY short from 85.6 and higher (divvy ETF)
DVY short from 88 and higher (divvy ETF)