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  Will Similarities Between Trump & Kennedy Rallies Continue & Conclude In A Market ?Slide? In Early 2018?  
  Lorimer Wilson on 2018-01-04 15:55:40.0

All things considered, I expect market valuation to become evenstock    market more expensive before the next correction takes hold. Comparing the Trump and Kennedy rallies?as in the first chart below?I expect Trump's market to build an even bigger slide.

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Here's an updated look at Trump's stock rally versus the Kennedy rally and subsequent Slide:

stock    returns

As you can see, we've now reached the chart's critical juncture?at this time of the calendar in 1962, the post-election rally was ending, and the Slide was about to begin. Our chart begs the question: Will the similarities continue and lead us into a Trump Slide in early 2018?

While it's certainly possible Trump's rally has run its course, I'll argue that it's unlikely and, to make my case, I'll rely largely on a single indicator, one that measures monetary policy. I use the indicator to help determine whether policy is behind the curve, ahead of the curve, or somewhere in between. In this article, I'll call it VCURVE, for ?versus the curve.?

The following chart compares VCURVE to every instance since 1954 when the stock market corrected by more than 10% and for at least two months:

vcurve    indicator

The upper panel shows an especially strong correlation with stock price cycles between 1954 and 1988. All ten of that period's market corrections coincided with an upward spike in VCURVE. Despite a few instances of delay between the change in VCURVE and the market's reaction, the indicator's early track record was stellar?it predicted every correction with almost no head fakes…-but the historical performance didn't persist after the 1980s at the same exceptional standard. The lower panel shows the correlation weakening, with jumps in VCURVE becoming a fifty?fifty proposition as to whether they signal a market correction.

The reason for the weaker correlation is open to debate, but I would say it's explained mostly by the Fed's practice of jumping to action at any hint of market turmoil. VCURVE probably hasn't shown the same predictive power under the FOMCs chaired by Alan Greenspan, Ben Bernanke and Janet Yellen because of the respective Greenspan, Bernanke and Yellen ?puts.? Whereas VCURVE before Greenspan was as reliable an indicator as you'll find, more recently the Fed's plunge-protection game often wins the day.

All that said, even the chart's lower panel shows an excellent market indicator. The head fakes may be more frequent, but every correction still lines up with a degree of VCURVE turbulence and, just as importantly, it's an easy indicator to calculate (Here are the two steps to do so) so what does it tell us today?

At first glance, the latest reading is ambiguous. It's higher than it was between 2012 and 2015, but only modestly so at 1.6%…The pattern gives us a reasonable guide to early 2018 and shows (chart here) that the latest reading of 1.6% falls within a range that's followed by real quarterly stock returns averaging over 3%?hardly a bearish signal…

On a three-month horizon most of the best indicators favor continued strength.

  • Credit markets aren't nearly as threatening as they were before recent bears?delinquencies, credit spreads and bank lending standards are all either neutral or just mildly bearish at worst.
  • Moreover, the real and financial economies appear settled into a ?virtuous? loop of mutually reinforcing strength, as I discussed here, while the GOP's tax cuts should help sustain that loop for a while longer.
  • Lastly, the Fed's inch-worming monetary tightening pace hasn't accumulated enough force as of yet to push VCURVE into a danger zone.

As possibly the most effective of all fundamental indicators, I don't recommend betting against VCURVE.

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