U.S. Stock Market - Outside The Box

Most major U.S. stock market indices posted record closing highs this past Friday, September 15, 2017. And many pundits on Wall Street and most investors on Main Street now see even higher prices for stocks ahead.

According to the latest University of Michigan survey, 65% of investors surveyed now think that U.S. stock prices will be higher a year from now. As you can see from the chart below, this 65% figure is a new all-time record high.

Latest University of Michigan Consumer Sentiment Survey

In my computer trading system, weekly chart sell signals were triggered last week in key stocks like Adobe (ADBE), Coca Cola (KO), McDonalds (MCD), Oracle (ORCL), and Yum Brands (YUM). However, new found strength in the energy sector helped the broader market indices to record high ground.

Oracle (ORCL) Weekly Chart with Computer-generated Buy & Sell Signals

So where do we go from here?

The Federal Reserve meets this coming week to discuss significant potential changes to its monetary policy. It is now widely believed that the Fed will begin to unwind its massive balance sheet immediately ahead. And the Fed may even telegraph another interest rate hike between now and year end! While tighter monetary policies are normally considered a negative for the stock market, investors don't seem to believe the steady stream of recent hawkish rhetoric from Fed officials ahead of this week's key meeting.

Massive hurricane damage throughout the South over the last several weeks is being viewed as bullish for stocks as reconstruction funds provide much needed "fiscal stimulus" for the economy. While 3rd quarter GDP results may take a minor hit as a result of this hurricane damage, it is widely believed that a rebound in GDP will soon follow in the 4th quarter and early next year as fiscal stimulus takes hold.

So what's not to like? Here are three potential negatives for stock prices:

1. Three major global central banks appear poised to tighten monetary policy immediately ahead (the U.S., the UK, and the ECB).

2. Corporate share buybacks are significantly lower this year, down about 20% from last year

3. According to the latest weekly report from the American Association of Individual Investors (AAII), investor allocations to stocks are near a record high while cash reserves are near a record low (see chart)

Latest AAII Weekly Survey

An interesting story is beginning to get more attention in the media. There appears to be evidence of vote tampering in several key swing states in the last Presidential election when Donald Trump won a surprise victory over Hillary Clinton. Influential former Vermont Governor Howard Dean thinks there may actually be credibility to the story that votes were "flipped" in major key Democratic strongholds like Milwaukee and Detroit. Since Donald Trump won Wisconsin and Michigan by the slimmest of margins, potential vote tampering could easily have changed the electoral results in those two key swings. Voter result irregularities are now being investigated, and the early evidence of potential hacking into electronic voting machines is compelling, at least on a statistical basis. For your review, I have listed three URL's that highlight some of the early investigations into this issue. Could Hillary Clinton have actually had the Presidential Election stolen from her? Was the "system actually rigged" as Donald Trump claimed it was almost every day from the moment he entered the Presidential race in June 2015?

www.unhackthevote.com/

www.votesleuth.org/

www.bluedotdaily.com/howard-dean-evidence-suggests-russia-falsified-votes-for-trump-victory/

My own view is that the "Russian Connection" to the Trump Administration will soon become as dominant an issue on Wall Street as it is now on Main Street. Special Prosecutor Robert Mueller's investigation of Russia's interference in our November 2016 National Election appears to be moving forward rather quickly now, and investors should not be surprised to see actual indictments handed down before the end of this year! Investors hoping for major tax reform (tax cuts) before year-end 2017 are likely to be disappointed, despite recent positive comments on this issue from Treasury Secretary Mnuchin.

Bottom Line: A major stock market correction is long overdue! While equity prices could easily retreat on the basis of valuations alone, my educated guess right now is that a "black swan" event or a surprisingly hawkish Fed proclamation will serve as the catalyst for the next market decline. President Trump is scheduled to speak before the United Nations this coming Tuesday. I personally doubt that President Trump will be the picture of diplomacy in his UN speech which will almost certainly address the ongoing crisis on the Korean Peninsula.