SuttonWatch.Net: The Emperor Has No Clothes

"I truly believe that the first 100 days of my Administration has been just about the most successful in our country's history," President Donald Trump said in his weekly address on Friday (April 28th), a day ahead of the closely watched 100-day milestone.

If the U.S. stock market is used as the gauge for measuring President Trump's "success" in his first 100 days of office, then the above comment is completely accurate. Wall Street investors certainly believe the rosy business scenarios coming out of the White House and NO ONE can argue this point. The International Center for Finance at Yale School of Management regularly surveys retail and institutional investors for their views on current valuations and one-year-ahead expected returns. In its latest survey, 99% of those surveyed now believe that U.S. stock prices will be higher in one year's time. 99% ! Wow !!

In the interest of full disclosure, I am not included among this 99% group. In fact, as part of the 1% who are "non-believers", I am significantly short both the S&P 500 Index and the Russell 2000 Index. Here are just a few noteworthy negatives facing U.S. stock prices immediately ahead:

1. Since 1950, U.S. stock prices have advanced approximately 7.5% on average during the period November 1st through April 30th. From May 1st through October 31st, the average gain is just 0.3%! (Negative seasonal bias: "Sell in May and go away!")

2. The latest monthly NYSE Margin Debt report (for March 2017) revealed a record $536.9 billion in customer borrowing to buy stocks, up more than $91 billion over the last 12 months. If a stock market correction does begin in earnest, it won't take long for those who have bought stocks on margin to seriously consider exiting their positions. This exodus from the margin buyers will then accelerate the overall price decline in most major stock market indexes.

3. The Trump Administration's much anticipated "Tax Reform" package was introduced last week, and it's a complete non-starter (and has no chance of passing in either the House or the Senate). While Trump spoke the truth when he declared that a "massive tax cut" proposal would be forthcoming, the package that was presented last week was just a "massive" tax cut for the wealthy that early projections strongly suggest will inflate the National Debt by as much as $7 trillion (or 35%) over the next 10 years. While there may be a minor cut in corporate income taxes during President Trump's term in office, no significant tax reform legislation can be expected this year, and maybe not even next year!
4. According to Bloomberg, total loans at the 15 largest U.S. regional banks declined by about $10 billion to $1.73 trillion in the first quarter, compared with the previous three-month period, the first drop in four years! All but two of those banks missed analysts’ estimates for total loans, as a slump in commercial and industrial lending directly impacted results. Is it possible that bank lending standards are tightening? Yes indeed!

5. The cold winds of economic recession are already being felt nationwide and globally. Gross Domestic Product grew by just 0.7% in the first quarter this year (as announced yesterday, Friday, April 28th), and expected continued central bank tightening in the U.S. and China, already underway, will stymie any significant economic growth for the rest of this year and maybe even into next year (despite optimistic forecasts to the contrary).

6. A daily chart sell signal was triggered by my computer trading system this past Friday, April 28th, in the Nasdaq Composite Index (which traded above 6,000 for the first time in history last week). See chart below.

7. After posting a record high last week, the Russell 2000 Index fell sharply (-1.18%) on Friday, April 28th. This closely watched index of small-cap stocks tends to be a leading indicator for the general market. The Russell 2000 Index is currently trading at 104 times trailing 12-month earnings (according to Birinyi Associates), an unsustainable level of valuation.
8. The Dow Jones Transportation Average, often another excellent leading indicator, is already down 5.62% from its record high posted on March 1, 2017. Please see DJTA Weekly Chart below (with multiple computer-generated sell signals reflected).

Bottom line: A major stock market correction in the U.S. looms immediately ahead. The S&P 500 Index and the Nasdaq Composite are both projected to lose at least 20% over the next 6 months, and the Russell 2000 Index is projected to sustain an even greater loss over the same time period.