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Thoughts from the Frontline

Year of the Octopus, Part 2

JANUARY 12, 2018

Lewitt: Charts Point to Caution

Another favorite of mine who really should get more attention is Michael Lewitt. He writes The Credit Strategist, which always gives me good fodder for thought. Here are some excerpts from Michael’s January forecast issue.

Stocks: Last year, like many others, I underestimated the power of the bull market as central banks poured another $2 trillion into the markets. My 2017 prediction of an 1800-2400 range on the S&P 500 was way off as markets exhibited the lowest volatility in history and never experienced even a 3% correction. My range is very wide again in 2018 (3000/2300) and we could easily hit the high end of my range at some point during the year. The reason for this is that the structure of markets favors stocks – fewer shares outstanding due to stock buybacks, 50% fewer public companies today versus 20 years ago, few attractive fixed income alternatives, and ETFs and other passive strategies hoovering up huge amounts of mindless capital. There are fewer places for people to invest their money, and Wall Street makes it easier than ever to invest it in stocks with very little intellectual effort.

I expect higher volatility in 2018 as central banks tighten and stocks start to see more competition from the short end of the curve. I expect the VIX to trade at an average closer to 15 than 10 in 2018. There will be more opportunities for short sellers (if there are any left) to make money in 2018 while long-only and index investors will have a tougher go. It would be very surprising if 2018 were anywhere as easy as 2017 was for bulls (and if people thought their famous managers had trouble making money when the market was rising, how do they think they are going to do when the market is struggling?).

Editor’s note: John Mauldin is a fantastic commentator and his weekly emails are free and read by almost a million people I believe. Google that name or click on the link.