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Outlook 2018: Equity, Crypto Rallies Will Slow...But Continue

By Market OverviewDec 26, 2017 12:40AM ET
Outlook 2018: Equity, Crypto Rallies Will Slow...But Continue
By   |  Dec 26, 2017 12:40AM ET
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Risk rose in 2017—via North Korea’s ongoing saber rattling in the form of ballistic missile tests; the re-emergence of global populism which this past year included Donald Trump’s first year as president of the US; the UK’s continuing, muddled Brexit negotiations; the ascent of Catalan separatism and recent Euroskeptic election victories such as Sebastian Kurz’s People’s Party in Austria, not to mention the weak outlook for a variety of nationalist-leaning parties in South and Central America—but global markets remained exuberant, with US markets at the forefront, though shares in South Korea (up 20.4% YTD), Brazil (+24.8% YTD) and Hong Kong (+34.4%) outpaced US gains (19.8% for the S&P). The best performing index this year however was Vietnam's Hanoi 30, up a whopping 50.5% on the year so far.

At the beginning of 2017 many wondered if the Dow Jones Industrial Average, which started the year at 19872.86, would hit 20K. As of the Friday before Christmas it closed at 24,754.06—25.2% higher on the year and 23.7% above that 20K ‘fantasy.’ Oh, and during the course of 2017 so far it’s hit over 70 new record highs, the most record closes for a year ever, surpassing the previous record of 69, made in 1995.

The S&P 500 wasn’t exactly a laggard either: it began 2017 at 2251.57 and closed before the holiday weekend at 2683.34, up 19.8%. The NASDAQ Composite also outperformed expectations, gaining 29.2% over the course of the year so far, propelled higher by tech sector shares which are currently up 33% on the year (using iShares US Technology (NYSE:IYW) as our benchmark).

Oil appears to finally have recovered from its swoon after the 2016 slump, but the dollar continues to look unsteady. Volatility remains practically non-existent, but cryptocurrencies have been on an eye-popping tear, barreling past other assets this year in terms of percentage gains: Bitcoin hurtled higher by 1200% for 2017, having started the year at $999; Ethereum rocketed from $8.17 to $624.3, up 7541%, and Ripple rallied from $0.00652 to $0.90, or 13,700%.

On a quieter note, the Fed delivered on their three-rate-hike promise this year, with another three forecast for 2018. Though the European Central Bank (ECB) has confirmed that it is cutting monthly asset purchases they remain cautious about raising rates. As for the Bank of England (BoE), along with general monetary policy decisions, they also must contend with what remains a great unknown—how will Brexit negotiations play out for the UK?

Many claim they’re happy to see 2017 in the rearview mirror, but from a markets perspective it was indeed a very good year. Will 2018 be as good (or perhaps better) for investors? We asked 12 of our most popular contributors, as well as some analysts, how they see markets performing as 2018 begins.

This installment covers this year's outperformers, Stocks and Cryptocurrencies. Read Part 2, for where our contributors believe Gold, Silver, Oil, the Euro and Dollar as well as major Central Bank Policy are headed in 2018.

Declan Fallon: Generational Rally to Continue, Small Caps Best Positioned to Gain

The market bottom of March 2009 came a year earlier than I thought but hasn’t disappointed in terms of its significance. As indices head into 2018 in a buoyant mood—marking the ninth year for the secular bull market—it’s hard to look beyond this continuing. However, Large Caps and Tech Indices, the latter in particular, are due a round of sustained selling which last afflicted the broader market in January/February 2016.

The only market to feel the full pinch of seller’s pain in 2016 was the Russell 2000. This is based on the top 5% of historic weak prices dating back to the inception of the index; measured as a relative percentage loss to the index’s 200-day MA. Comparable extremes for the NASDAQ occurred during October 2008, and for the S&P during November 201 (the latter based on data going back to 1950).

For the Russell 2000, the 2016 January/February selloff should have flushed out all the weak hands, thus resetting the cyclical bull market count which is now just a couple of years old and could last another two to three years.

While a sustained selloff will no doubt attract talks of a crash, in real terms any selloff will only give back a fraction of the nine year gains; for example, a 25% loss (aka ‘bear market’) in the S&P would bring the index to around 1,985—well above the 2016 swing low of 1,810. Again, context is everything. A 40% style crash would bring the S&P to 1,600s, last seen in the latter part of 2013 and four years after the low generated by the credit crisis.

Consequently, don’t be afraid to start accumulating shares (i.e. component stocks of the relative indices) once the S&P drops into the 15% of historic weak action which kicks in on a 4.8% drop below its 200-day MA, becoming an historic extreme (5%) when the S&P is 10.5% below its 200-day MA. Likewise, accumulate NASDAQ shares when the index loses 7.5% against its 200-day MA with historic extremes at a 19.1% loss.

For the Russell 2000, which covered the spectrum of losses in early 2016, accumulate when the index is 4.8% off its 200-day MA and hits an extreme at a 14.8% loss. This is based from an end-of-day close, not an intraday low. The precision on these figures (and when to start taking profits) can be found in the tables available as a footnote, here.

Joseph L. Shaefer: This Bull Still Has Legs

No bull market dies of natural causes. This one is no exception. Despite the anguished cries of short-sellers and red flags thrown carelessly about by those left behind and now desperately seeking an "I told you so," this bull still has legs.

Interest rates are low. An extra 1/4 percent rise is not going to cause any concern. The economy hovers between inflation (mostly government-caused in both education and health care) and deflation (especially in energy thanks to supply/demand factors, and food thanks to greater competition and excellent crop yields). No real changes there.

Valuations? In recent articles I have discussed over a dozen different Fallen Angels and identified scores more. These companies can be bought now at prices available only a year ago, or in some cases many years back. Yes, many shares are overvalued. So don't buy those! In trailing sectors and beaten-down companies there is still a great deal of money to be made in the early going in 2018.

Why should this change as the year goes on? Lots of reasons. Fewer and fewer such tax-selling bargains and "I don't want to miss the party" buying. Greater leverage. The entry of johnny-come-lately nervous holders. The likelihood of further rate increases. A likely rebound in commodities including energy—good for owners of the right energy shares, bad for Industrials, Materials, and so many other sectors. Year-on-year earnings comparisons; what looked great "in comparison to" last year's earnings is less likely to be very impressive compared to this year.

And finally, at long last, valuation. By mid-year, instead of defending forward median share prices of 25 times earnings, Wall Street will be touting 28 times earnings as reasonable, with 30 times earnings OK for the fastest growers. This will be the point at which a small boy will cry out to his mum, "But the emperor has no clothes!" The latter half of 2018 will be a great time to make money in long/short funds and other non-market-sensitive positions.

As for specific stocks: Valero (NYSE:VLO), Range Resources (NYSE:RRC) and Encana (NYSE:ECA) are my favorite energy stocks for the coming months. I own them all. Of the Fallen Angels I mentioned above, ​I personally own Teva (NYSE:TEVA), Celgene (NASDAQ:CELG), NCR (NYSE:NCR), Bed Bath & Beyond (NASDAQ:BBBY), ​BT Group (NYSE:BT), Kroger (NYSE:KR) and Mednax Inc (NYSE:MD).

Candy Matheson: More Volatility, Additional Political Uncertainty

The full article from which this was excerpted was originally published on December 4, 2017.

Taking into consideration the uncertainty that next year's mid-term elections will bring, coupled with likely interest rate hikes, I'd project that we'll likely to see volatility rise in 2018 and the SPX (and the other 8 Major Indices) gain only about half of what they gained this year. This would mean an approximate increase of 10% for the SPX. I expect Technology to remain fairly strong. Small-Caps may struggle more than Big-Caps. Nonetheless, I anticipate that the U.S. markets will continue to outperform other World Markets.

With respect to the S&P 500, NASDAQ 100, and Russell 2000 Indices, I'd watch to see whether the following major support levels can be held on the following Index/Volatility ratios...a breach of those important levels could produce a selloff :

  • SPX:VIX Ratio -- 200
  • NDX:VXN Ratio -- 350
  • RUT:RVX Ratio -- 80

Clement Thibault, Analyst: 15-20% Correction Ahead, But No Apocalypse

I believe we're in borderline, never-before-seen territory when it comes to the US stock market. The only two red months for the S&P in 2017 were March and August, when the index lost 18 and 6 points, respectively. That’s -0.7% and -0.2% for the worst months of the year. The Dow is up 25.4% in 2017, while the S&P is up "only" 20.1%.

Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) are all up over 50% this year. That type of double-digit growth is unusual for mega-cap, mature companies, which each of these is of course.

Clearly, they're past their start-up phases. So expectations for this sort of robust growth—more commonly seen with promising, early stage growth prospects—cannot account for the tremendous increase in each of their share prices. To each company its own reasons, naturally, but they all indeed continued to grow over the year. Of course, the Technology sector in general enjoyed positive momentum and sentiment throughout the year, which helped propel market leaders higher.

Overall, however, the market seems stretched. The last uninterrupted bull run took place from 2012 to 2014 and was the result of a recovery following a crash. This isn't where we are now. I believe we will witness a 15-20% correction in the first half of 2018. Corrections are, after all, a natural part of every market cycle, regardless of any reforms enacted by the Trump administration.

However, I do not see an apocalyptic scenario on the horizon. The US economy does seem to be strengthening, albeit slowly. As well, the closest thing we've had to a correction this year was the 3.25% drop in March. So it’s inevitable that this impressive no-real-correction streak will come to an end. Afterward, the reasonably expensive tech stocks (such as Facebook (NASDAQ:FB) or Alphabet (NASDAQ:GOOGL)) will be one of the most attractive investments for the second half of the year. CryptoCurrency Team: Mania Moderates and Connoisseurship Takes Hold

Without doubt, 2017 was the year of crypto mania. Bitcoin, which grabbed headlines early and often this past year, saw heart-stopping gains, but other digital currencies, such as Ripple and Litecoin, had even better returns from a percentage point of view.

Merely owning an asset labeled cryptocurrency could have yielded thousands of percent of added value for an investor, regardless of the digital currency's technological protocol. During the final days of 2017 however, a massive wave of cryptocurrency selling took hold, which appears to still be in progress.

We believe this signals that sentiment toward Bitcoin and all sister alt-currencies is moderating. And that moderation will most likely characterize trading in 2018.

As well, we're seeing significant ‘conventional economy’ entities getting in on the crypto action; just this month both CME and CBOE have started issuing Bitcoin futures contracts; there's talk of retailers, financial organizations and even central banks adopting various technologies and officially supporting (or even issuing) a variety of major cryptocurrencies. As mainstream adaption becomes a reality we can expect to see a calming of the crypto storm.

In that way, we expect the crypto investor mindset to shift from ‘all you can eat’ to something more akin to technology connoisseur, wherein serious digital currency investors will seek out the most promising and groundbreaking of digital technologies. In the wake of this shift, smaller investors will likely also attempt to gain relevant and appropriate understanding of the differences between the various alt-currency technologies.

In our opinion, one outstanding, currently available asset that we believe will garner more attention in 2018 is IOTA (the name is derived from Internet-of-Things), which we wrote about here. Its founders have taken it quite a way in terms of technological achievement and significantly, have done so outside the blockchain protocol, using something called 'Tangle' instead. Indeed, it's the first cryptocurrency to develop a non-blockchain technology but also remain decentralized.

Because the Tangle doesn’t rely on miners to verify transactions, it also doesn't necessitate transaction fees, allowing even micro transactions. And unlike most blockchain-based currencies, the IOTA network requires a minimal amount of GPU/CPU (computing power) so can be managed on any home device.

We believe that sets IOTA on a path to become “the next Bitcoin,” but with more stability and less volatility. During 2017 IOTA 'only' gained 450% in value but managed to sustain a relatively solid pace of growth with restrained highs and measured lows. Currently the sixth most popular alt-currency based on its $10.25B market cap, we think IOTA could climb into the top 5 by the end of 2018.

Now read Part 2 for contributor thoughts on Gold, Silver, Oil, USD, Euro and Central Bank Policy.

Outlook 2018: Equity, Crypto Rallies Will Slow...But Continue

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Outlook 2018: Equity, Crypto Rallies Will Slow...But Continue

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Ambrose Agobie
Ambrose Agobie Jan 01, 2018 7:24PM ET
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Thank you.. all the best in 2018
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Ilya Atomiq
Ilya Atomiq Dec 26, 2017 2:57PM ET
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Great article, respect!.What do you think of Netflix? Hold or sell?
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Dec 26, 2017 1:17PM ET
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for long time, you were propagating about rallies on cryptos to put all the millennia sheeples inside and take your toxic assets and one of the biggest fraudulent systems, after you started dumpin' your longs on the top of them, but this needs more time, because people get informed faster and see through your deceiving moves so they dumped fast too a big quantity, then you propagated more and they re-entered and you dumped on them and for the first time you create an article of ''Bitcoin on BEAR MARKET'', Bear market means collapse of more than 30%, when this occurs in this fraudulent system, it always goes towards 75 to 90% downwards, but this time it will be different, it will be a drop of 80 to 99%, because there will be no buyers. BEAR MARKET it's a BEAR MARKET, don't get deceived from titles like that, because they try to put more sheeple inside their slaughtermachine. dump your coins, and if you have humungous lump sums short a really small quantity. More Downside than upside
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john bohn
john bohn Dec 26, 2017 1:03PM ET
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Thanks for the vague title
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