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As investors await the Dow Jones 20,000 with baited breath, one widely followed chart watcher believes the current market rally is actually on its last legs.
On Friday, blue chip shares in the Dow Industrial Average flirted with the psychologically charged 20,000 level, which have largely been driven higher by anticipation over President-elect Donald Trump's business-friendly policies. Yet a few observers think the party is nearly over, and the punch bowl is about to run dry.
"Risk has been priced out of the market," said Sven Henrich of NorthmanTrader.com on CNBC's "Futures Now." Henrich, who is known online as the Northman Trader, said that despite the abundance of optimism on the part of investors, technical indicators could be pointing to some near-term pain.
According to the Northman's chartwork, every time the S&P 500 Index has hit new highs, it eventually retreats back towards its weekly 25-day moving average line, which would translate to a 4 percent pullback from current levels. The S&P 500 has rallied 6 percent since the election, and hit an intraday record high on Friday.
"I would expect that at some point there would be a buying opportunity for people who may want to invest in this market," said Henrich. "But if this line breaks, we may see significantly more downside that we've seen in previous corrections as well."
What's more, Henrich also believes that the S&P 500 has continued to trade in a "bearish wedge pattern" that began just after the end of the last recession. The wedge pattern Henrich speaks of consists of two trend lines: One that runs along the S&P's highs and a second that runs along its lows, that look to meet sometime in 2017. It is at that point that Henrich believes the rally will have run its course, and a downside will soon follow.
On a fundamental basis, the Northman Trader is troubled by "record debt levels" that the global governments have incurred.
"In 2016, the U.S. government ran a deficit of over $600 billion," explained Henrich." "If we now add tax cuts and stimulus spending, you're either going to have to cut a significant amount of programs somewhere, or you're going to end up with an even larger deficit."
A major Wall Street firm is encouraging investors to start looking for opportunities in Europe, even as uncertainty surrounding Brexit and upcoming elections in the region linger.
BlackRock, which formally upgraded its rating on European assets to neutral from underweight, believes this could be a 'contrarian' way for investors to profit this year.
"We think a lot of the risk is starting to be priced in. So, you're actually being paid a nice premium," said Terry Simpson, the firm's multi-asset investment strategist this week on CNBC's "Futures Now."
According to Simpson, BlackRock is "actually starting to inch back in... This is still a very undervalued market relative to the United States."
Simpson is telling clients to seriously consider investing in overseas developed markets. Instead of just relying on recent U.S. gains which have been chiefly driven by multiple expansion, he says investors should rotate back into Europe and put money to work in Japan.
"We look at the performance of Europe and Japan absolute relative to the U.S. over the last month to three months. That's actually been a really good trade," he said.
In just the early days of 2017, the FTSE 100 is up nearly a full percentage point, building on last year's double digit percentage returns.
If you thought stocks were soaring sky high, you might want to brace yourselves for another leg up and more record levels ahead.
Tuesday on CNBC's "Futures Now," Louise Yamada, managing director at Louise Yamada Technical Research Advisors, said that history shows that the last months of 2016 indicate that the markets will continue their rally in 2017.
"Even though the Dow, the S&P and Nasdaq didn't suffer 20 percent declines in [late 2015 and early 2016], the other markets [like the Russell 2000 and Nasdaq 400] were down 20 percent or more," she explained. "It's very much like the stealth bear market that we had in 1994 and 1995 where the small and mid-cap stocks got hammered and the large caps only pulled back 9 percent."
The assessment leads Yamada to believe that the markets had been in an "interim cyclical bear market" for two years, but that the recent stock rally is a "valid breakout into a new leg up." This even as Yamada believes large-cap indexes like the Dow could see a pullback before another rally of "either one-third to one-half," which she describes as a "general rule of thumb" in a note released on Dec. 30.
Yamada believes that the S&P 500 could hit 2,400 by the end of 2017, and the Dow could hit 22,000 by that time as well. This means that Yamada sees a rally of about 6 percent and 10 percent for the large-cap indexes, respectively.
The spectacular oil run of 2016 doesn't have much left in the tank, says one oil analyst who sees oil's supply troubles carrying into the New Year.
Crude saw its best year since 2009, surging almost 45 percent and driving energy to become the year's best-performing sector. The good news has investors and oil companies hoping for another big rally in 2017, especially in light of OPEC and non-OPEC agreements among countries to cut oil production, an attempt to solve global oversupply.
The OPEC meeting in late November caused oil to jump more than 12 percent in just one week, and the commodity rode the OPEC news momentum to hit new highs in December. Yet according to Tom Kloza, global head of energy analysis at the Oil Price Information Service, the same agreement that brought so much joy could also be oil's undoing.
"I do think we'll see [demand exceed supply] in 2017, but I think it's going to be front-end loaded," said Kloza to CNBC's "Futures Now" last week.
Kloza believes that oil could run back to its high of $62.83, which it saw in May 2015, but any higher is doubtful. This means that oil could still surge an impressive 23 percent or so, however that may be the limit to its run up in 2017.
"We'll see some compliance with the OPEC quotas and the non-OPEC agreement, but it will fade into the second quarter and it may not be there at all in the second half of 2017," he added.
In other words, the worst case scenario of OPEC and non-OPEC countries putting aside their production cut agreements could play out. But global non-compliance aside, Kloza also believes that domestic factors could also exacerbate oil's supply glut.
"As you see prices go up above $55 a barrel in the forward markets, you will unleash various beasts in West Texas, North Dakota and even Oklahoma called shale," said Kloza, referring to the vast shale fields powering the U.S. energy production boom.
"That will be the great determinant, or the factor, that keeps oil prices at bay," the analyst added.
When the Nasdaq was hitting all-time records during the dot-com bubble, Ned Riley alerted investors to brace for steep declines.
But now, the veteran stock market strategist says there's nothing to fear as technology stocks jump to new highs.
In fact, Riley believes tech will be the big winner next year, especially as revenue picks up from the overseas markets and delivers a tremendous boost to profits.
"I look at 2017 as an exciting year," said Riley, who runs research firm Riley Asset Management, Thursday on CNBC's "Futures Now." "Secular growth for this sector is particularly strong for the next three to five years."
Riley points out he doesn't detect the "irrational exuberance" that characterized the tech bubble in 1999 and 2000. He says financial prospects for companies are clearly improving, not fading.
"Earnings are starting to turn up again. It looks like we'll have a plus year in 2017. It may not replicate the same kind of recoveries we've seen from cyclical lows. But still I think something on the order of 5 to 8 percent seems reasonable for the S&P 500," said Riley.
The Nasdaq surpassed the 5,500 level for the first time ever on Tuesday, before losing some momentum to close at 5,487.44. But that was still a record close for the index, which is up more than 8 percent this year.
"As far as the market itself is concerned, the valuation may be on the high end, but people seem to ignore the fact that when you look at the price-earnings ratio to the inflation rate, which is running at about 2 percent, it doesn't seem that unreasonable relative to history," he said.
Riley, a frequent guest on CNBC during the late 1990s and early 2000s, was the chief investment strategist at State Street Global Research. The Nasdaq has soared nearly 400 percent since hitting the bubble low on Oct. 9, 2002.
He has been a bull on tech stocks for the past five years, says Apple is his top tech pick. It's a name he's owned long term.
"Apple still looks like the cheapest stock out there," said Riley. "I just think that they're [investors] pricing it wrong and they're not pricing it to the long-term growth rate."
"This has been a bull market that everyone has learned to hate," he said.
"If one looks at the asset allocation exposure that they have in the markets, that's the critical element. The public has been buying bonds to the tune of over a trillion dollars for the last four years. And that money is what I think is going to be the strong equity money which pushes this market up next year."
It's been a banner year for the commodities market, but for investors wondering how to play the space in 2017, Dennis Gartman sees volatility in many of the traditional assets.
According to Gartman, "The trade for the next year," or at least for the next few months, is actually in soft agricultural commodities.
"Historically at this time of the year, being long corn and short wheat [is the trade, especially as] the winter wheat crop seems to be in pretty good shape," the editor and publisher of The Gartman Letter said Tuesday on CNBC's "Futures Now."
"We've gotten decent rains and snow where needed, we had some cold temperatures last week that might've done a little damage to the wintering wheat crop but on balance, we will do fine."
But if Gartman were to own a commodity next year, he still believes that gold is the one for investors' portfolios. This even though the yellow metal is seeing its longest losing streak in 12 years, with seven straight weeks of decline. He says that from a technical standpoint, gold is actually holding its own with a support level around $1,125.
This means that Gartman doesn't see gold dropping below $1,125, even though the metal has plunged more than 10 percent since the election in November.
A noted Wall Street veteran has hiked his earnings forecast for 2017, citing a much more business friendly environment under the incoming administration of President-elect Donald Trump.
Even though the Dow Jones Industrial Average and S&P 500 Index have already jumped soared since the November 8th presidential election, economist Edward Yardeni argued that stocks are actually not overvalued. He said that notion is one of the biggest misconceptions in the market, and it could mean even bigger gains for the market.
"I now think that earnings instead of being up eight percent, it could be up closer to 20 percent. That's the kind of impact the substantial tax cuts could have," said Yardeni, president of Yardeni Research recently on CNBC's "Futures Now."
"It may not happen until the summer or fall. The question is: Will it be retroactive? I think it will be retroactive," he added.
The historical gains could just be beginning.
"As soon as Trump won, the markets started to rethink whether he was bullish or bearish, and very quickly concluded he was bullish because of his economic program. Not only that, he came in with a majority in both houses of Congress which increases the chances they'll get his tax cuts passed," said Yardeni.
"I think it's a good bet."
Prepare for more record highs over the next few years, says one Bank of America Merrill Lynch strategist, who says a similar trend in history suggests that this bull market is far from over.
"We actually think the Dow will surpass 20,000 and go much, much higher than that," said Stephen Suttmeier, his firm's chief equity technical strategist. "We do believe that we are in a secular bull trend [that was] signaled on the April 2013 breakout in the S&P 500."
The Dow came within 13 points of 20,000 Tuesday before retreating and closing roughly 30 points below the milestone. The index is now on pace for its best year since 2013, and the S&P 500 is tracking for its best year since 2014.
Suttmeier points out that much like today, rising bond yields also corresponded to a surge in equities in the 1950s. By the time bond yields moved to 5 or 6 percent in the 1960s, the S&P 500 had rallied about 460 percent over the decade or so.
"That bull run into the mid-1960s was actually an S&P secular bull trend that was associated with a low and rising interest rate environment," Suttmeier said. "That is how we're set up right here. "
In other words, Suttmeier believes that "there is at least a decade or more to run here on the S&P 500 and other U.S. equity averages."
The strategist expects that the current secular bull trend could launch the S&P 500 to between 2,330 and 2,425 next year. It closed at 2,270.76 on Tuesday.
The Trump rally marks the biggest post-election run for stocks ever—but don't expect this momentum to carry through to year-end.
Wells Fargo strategist Scott Wren, who correctly called the Brexit and post-election rallies, now believes that while the market does have room to run, the fact that the market is currently trading at "fair value." That could mean that it's about to lose some steam.
"This market is trading on the fundamentals over the next 6 to 12 months," Wren said last week on CNBC's "Futures Now." He added: "It would've been trading here, or very close to here, whoever had won the election."
This doesn't just go for the S&P 500 Index, says Wren, but the Dow Jones Industrial Average as well. The index has been hovering just under the highly-anticipated 20,000 level, but Wren actually believes that the event would be "purely a psychological level" rather than a technical level that would give insight into the Dow's next move.
In Wren's eyes, the market will have to face the possibility of inflation, wage inflation, and the notion that the Federal Reserve may hike rates more times than previously thought.
While the Fed did declare that three rate hikes may occur in 2017, Wren believes that anything more than two could actually send bond yields falling and give investors something to worry about.
These reasons together lead Wren to believe that the market will be relatively flat in the year to come, predicting that the S&P will trade between 2,230 and 2,330 by the end of 2017. Wren had previously predicted that the S&P would end between 2,190 and 2,290 this year, which it is currently on track to do.
"The market doesn't trade for anything for more than a brief period of time on what might happen two or four years down the road," said Wren.
The flurry of new stock market highs has hardly been abnormal and may be the beginning of a longer-term trend, according to Bespoke Investment Group co-founder Paul Hickey — and he has a chart to demonstrate this.
"It seems as if we've been hitting new highs every day recently," Hickey told CNBC's "Futures Now" on Tuesday.
"But as far as closing all-time highs are concerned, we've only seen about seven postelection. And, outside of the period right after Brexit where [we] saw 10, we've seen 17 so far this year. Looking back historically, there hasn't been an exceptionally large number of new closing highs in a given year. We tend to focus on what's happened recently, but already people are forgetting that for about a year and a half the S&P did nothing,"
Despite the "illusion" that the all-time highs have been fast and furious, Hickey says the odds are strong that the Dow will soon sprint to highs above the 20,000 mark — especially if retail investors begin to believe in the stamina of this rally.
"Less than half of investors consider themselves bullish at this point," said Hickey.
"Even after these new highs we've seen postelection, individual investor sentiment as measured by the American Association of Individual Investors still hasn't even gotten above 50 percent. So, individual investors not only have been sitting out this recent rally, but most of the bull market."
He believes it's not too late for investors to take part in the rally. It could still temporarily cool down, and that's when investors who haven't put money to work in this rally should strike, Hickey said.
"A small pullback could happen any time. It doesn't seem like that given the last several days. But the way we would look at a pullback here is for people who have been on the sidelines to add some exposure rather than to start panicking," said Hickey. "We should see earnings growth really pick up going forward into Q4 and next year."
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