【Tetsu Emori's Real Trading Strategy】No change in the bullish market outlook for 2018 (2018-01-04)
Tetsu Emori's Real Trading Strategy January 4, 2018, 08:35
Streamer: ECM
Happy New Year.
I look forward to your continued support this year as well.
We will strive to continue providing good trading strategies this year as well.
We appreciate your continued support as always.
The new book “U.S. Stocks Will Triple” has been released.
Please subscribe. You can understand the essence of market analysis and investment decisions.
This year's markets to watch include U.S. stocks as well as the commodity markets.
Prices have already risen, but we see room for further gains in crude oil.
If crude oil rises, gold and base metals will rise as well. In particular, base metals face obvious future supply-demand tightness.
I believe the market will unfold in a dynamic way going forward.
Let’s enjoy the historic bull market through 2020.
〔EQUITY MARKET〕
[U.S. stocks and Western bond markets: market overview and analysis]
U.S. stocks continued to rise on positive economic indicators. The Dow Jones Industrial Average closed up 98.67 points at 24,922.68, a new intraday high for the third day in a row. The Nasdaq Composite rose 58.63 points to 7,065.53, also a new intraday high for the second day in a row. December’s ISM Manufacturing PMI came in at 59.7, up from 58.2, beating the 58.1 expectation. November construction spending rose 0.8% month over month, exceeding the 0.5% expected. Buoyed by these solid data, the Dow hit an intraday high for the 10th time in the last trading sessions.
On the other hand, the December 12–13 FOMC minutes showed that most participants supported a gradual pace of rate hikes. It was noted that tax cuts and other measures could bolster the economy, which fueled buying sentiment. Additionally, with Iran’s anti-government protests contributing to oil prices at a three-year high, energy stocks were bought, lifting the indices. Exxon Mobil rose 2.0%, Chevron 0.7%, ConocoPhillips 1.8%. IBM rose 2.8% and led the Dow higher. United Technologies rose 1.5%, UnitedHealth rose 1.1% as well. Intel fell 3.4% on reports of security flaws in its chip designs. In response, AMD and Nvidia surged 5.2% and 6.6%, respectively. Tech shares were also strong, with Amazon up 1.2% and Facebook and Alphabet up 1.7% each.
Last December’s ISM Manufacturing PMI rose to 59.7, up from 58.2, indicating expansion for the 16th consecutive month. Of the 18 industries surveyed, 16 reported expansion (including machinery, computers/electronics, paper products, apparel & leather), while wood products and textiles contracted. New orders rose 5.4 points to 69.4, production rose 1.9 points to 65.8, employment fell 2.7 points to 57.0, supplier deliveries rose 1.4 points to 57.9, and inventories rose 1.5 points to 48.5.
Additionally, prices rose 3.5 points to 69.0, backlog of orders rose 1.0 point to 56.0, exports rose 2.5 points to 58.5, and imports rose 3.0 points to 57.5.
In December 2017, U.S. light-vehicle sales fell 5.2% year over year to 1,603,129 units. For the year, sales were 17.90 million units. December 2016 was 18.20 million. For 2017, U.S. light-vehicle sales totaled 17.230436 million, down 1.8% from the previous year, the first annual decline in eight years. 2018 is expected to fall below 17 million, suggesting the U.S. light-vehicle market, which had risen, is entering a downturn. Last year, buoyed by the domestic economy, aggressive promotional activity by automakers and replacement demand after major hurricanes helped keep the annual figure around 17 million for three consecutive years.
While SUVs and other large vehicles remained popular, sedans struggled. In 2018, a flood of used cars and the Federal Reserve’s rate hikes are expected to further weigh on sales. However, the impact of tax reform on the economy and on sales remains to be assessed.
In the FOMC minutes from the December 12–13 meeting, participants anticipated that tax cuts would lift growth and supported continued rate hikes, though views differed on the pace given subdued inflation. The economic and rate outlook was revised higher for 2018 and beyond; the committee projected three rate hikes in 2018, the same pace as 2017. Many participants noted that tax cuts would spur capex; a few suggested personal income tax cuts could boost labor supply. A broad majority supported continued rate hikes to address inflation risks. Some warned that asset prices could pose financial stability risks if they overshoot. There was discussion of a flattening yield curve; overall, participants agreed that current levels are not historically unusual. A few argued that a future flattening that signals a recession should be watched closely. They then raised the policy rate by 0.25 percentage point to 1.25%–1.50%.
U.S. Treasuries yields were mixed. The 10-year note fell 1.8 basis points to 2.447%, and the 30-year bond yield fell 2.5 basis points to 2.785%. The two-year yield rose to 1.939% at one point, a nine-year high, before easing to 1.931%. Consequently, the 2–10 year yield spread narrowed to 0.514%. Following the minutes, the market maintained the view that the Fed would continue a gradual path of rate hikes. Yet, with unemployment improving while inflation and wages lag, the pace of hikes is expected to remain modest. The ISM Manufacturing Index was strong, supporting the case for economic resilience, but it alone is unlikely to trigger immediate rate hikes.
The bond market’s yields varied, and while the yield curve flattening continued, this is a normal part of a broader rise in stock prices. A full flattening is not anticipated until mid-2019 at the earliest. Until then, equities are likely to rise. The proper interpretation of yield-curve flattening is that if it flattens further into positive territory and then moves back toward negative, stock prices may fall. Once this pattern is confirmed, a stock price peak may be identified. U.S. long-term rates are still more than 1% below the pre-crisis level of about 3.5%. Even if market rates rise by 1%, they would still be near historical lows. However, rates are not expected to rise much this year. The tech-led rally is expected to continue into around 2020.
Euro-area financial markets saw yields drift lower. The EU’s comprehensive new regulation, MiFID II, went into effect that day. Investors are watching its impact closely. Germany’s 10-year yield fell 2 basis points to 0.44%. The prior day, a statement by ECB Executive Board member Koer kept yields near multi-year highs. Koer said the bond-buying program due to expire in September could be extended; however, considering the economy, extending the program announced last October may be the last reasonable option. The ECB noted it could continue the program “as needed,” but also that inflation has more policy tools if it overshoots. As a result, German bund yields initially stayed high but fell due to heavy bond redemptions domestically. Across the euro area, most government bond yields fell 1–4 basis points. Italy’s 10-year yield fell 6 basis points to 2.03%. The Italian-German 10-year yield spread narrowed to 160 basis points. Meanwhile, MiFID II, effective from this day, requires banks, asset managers, and traders to report detailed trading data to increase transparency across stocks, bonds, commodities, and derivatives, with the aim of investor protection and learning from past crises. Market participants expect lower trading volumes in the near term as the regulation is assessed.
December euro-area manufacturing PMI revised to 60.6, a high since the series began in June 1997. The preliminary reading for November was 60.1. Euro-area manufacturing is gathering momentum, with new orders at 61.5 in December, up from 61.4 in November, near record highs. Backlogs and employment also remained elevated, underscoring the strength of the euro-area economy. Germany’s December manufacturing PMI was revised to 63.3, up from 62.5, the highest since the series began in 1996. Overseas demand has surged, straining production capacity and causing shipments to lag by more than 20 years in some cases. Production, new orders, and exports all grew, with overseas orders at the highest on record since the series began. The global economy is benefiting from this expansion.
【U.S. stock trading strategy】
2017 saw Dow up 25.2%, S&P 500 up 19.5%, and Nasdaq up 28.2%. Tensions over North Korea and uncertainties about the Trump administration weighed on markets, yet stocks advanced. There were only a handful of days—about four—when the S&P 500 fell more than 1% in the entire year, reflecting a very strong year. For many market participants, 2017 was a year full of unsurprising surprises. Nevertheless, the market does not appear to be purely bullish. Even though the U.S. enacted a significant tax reform at year-end, uncertainties about the Trump administration linger. North Korea tensions have not progressed, and concerns remain about Middle East stability given Israel policy. The key question is whether the Trump administration can achieve the promised >3% growth. Also last year, multilateral trade agreements like TPP were abandoned, drawing international criticism. Protectionist policies have not changed, and expectations are that 2018 could bring more regulatory risk globally. Meanwhile, Trump has claimed that tax cuts totaling about $1.5 trillion over ten years would boost U.S. manufacturing. Yet some argue the fiscal deterioration would offset much of the benefits, limiting the economic impact. At the same time, long-term U.S. rates have risen, potentially weighing on growth. Estimates by U.S. think tanks suggest the growth impulse from tax cuts might remain around 0.1 percentage point per year. The next goal is a $1 trillion infrastructure investment; however, with tax cuts, fiscal room is tight, making realization challenging. In short, there remains substantial criticism of the Trump administration. Yet, if you think about it calmly, enacting tax reform is fulfilling a pledge—“talk the talk and walk the walk.” While doubts about governance exist, the action and execution power could be underrated by critics. The market’s direction is what truly matters, not political commentary. In any case, inflation remains below the 2% target, and there is no solid basis for rapid tightening. If inflation and wages do not pick up, tightening could destabilize the economy. The market’s anxiety is likely exaggerated. Powell’s leadership will be tested, but ultimately the direction of the economy is not determined by him alone. Greater forces are at work in the market, including the direction of Trump administration policy. If you think Trump can push through policies unilaterally, that would be a grave mistake. Naturally, you should question why last year’s stock prices moved as they did. There is an answer, and I plan to share it with readers of this newsletter gradually. This year’s newsletter will be enjoyable from a different perspective as well.
There is no basis for that. Inflation remains well below the price-stability target of 2%, and tightening would merely slow growth. There are no Fed officials willing to take such a bold step. Unemployment is at historically low levels, but wages are not rising. Market fears seem excessive. Powell’s policy skills are being questioned, but ultimately the economy’s direction is not determined by them. A larger force is at work in the market. The same applies to the Trump administration’s policy direction. If you believe Trump can push policies through on his own, that would be a grave mistake. It is natural to wonder why last year’s stock prices moved as they did. However, there is an answer, and I will share it with readers of this newsletter in due course. This year’s newsletter will be enjoyable from a broader perspective as well.
If you think policy can be pushed through unilaterally, that would be a major mistake. It’s natural to question why such statements are possible and why last year’s stock prices moved as they did. But there is an answer, and I plan to share it with readers of this newsletter step by step. This year’s newsletter will be enjoyable from a broader perspective as well.
I have raised the 2018 expected ranges, so please take a look. The base scenario is clearly bullish. The January range has also been raised. The Dow, S&P 500, and Nasdaq indices have remained long since last year, and the basic policy remains unchanged. The market has started the year solidly, and as before, while watching various indicators and keeping an eye on bubble risk, if there are changes in the market, I will continue with the current strategy. 2018 could see some volatile moments, but trust in Trump administration policy should grow, and market anxieties will be eased.
Optimistic. At the start of the year, the S&P 500 rose 0.20% on Jan 2, 0.29% on Jan 3, and 0.01% lower on Jan 4. The results showed Jan 2 up 0.83% and Jan 3 up 0.64%, well above historical averages. Meanwhile, January performance shows the Dow up 0.9%, the S&P 500 up 1.0%, and the Nasdaq up 2.6%. Over 12 months, the rankings stood at 6th, 6th, and 1st, underscoring Nasdaq’s strength. Nasdaq remains the top pick as before. However, in a mid-term election year, performance tends to slip to 0.9% down, 1.0% down, and 0.7% down, respectively. It remains to be seen whether this year will follow past averages. Additionally, energy stocks performed best when bought in December and sold in July. Crude oil prices have been rising as expected. Energy stocks have increased, matching past patterns. In this trading pattern, the past 15-year average return is 11.8%, the 10-year average is 8.0%, and the 5-year average is 9.5%.
There is still room for oil to rise, so the potential for further gains in energy stocks remains significant. Crude oil trends will continue to be a key focus this year.
The focus at the start of the year is the Q4 2017 earnings announcements. If earnings expand smoothly, stock prices will rise and test higher levels. From next year, tax reform will bring substantial positive effects on corporate earnings. If earnings are lifted, stock prices will rise as well. Additionally, if the cash freed by tax cuts is used for buybacks or M&A, that will be a major upside factor for stocks. The long bull market that has continued for 17 years is entering the final stretch of roughly 8–9 years of ascent. The rally over the next two to three years is expected to be the strongest. In particular, Nasdaq’s movement resembles the tech bubble era. A major bull market is anticipated. The last two years of the tech bubble rose rapidly, and a similar pattern could emerge again, creating a massive bubble.
The yield-curve flattening is expected to continue narrowing, which is typical as stocks rally. Full flattening is unlikely until mid-2019 at the earliest. Until then, stocks are expected to rise. The correct interpretation of yield-curve flattening is that if it moves from flattening into positive territory and then reverts to negative, stock prices may decline. Once this is observed, stock market peaks may be identified. U.S. long-term rates remain around 3.5%, still over 1% below pre-crisis lows. Even if rates rise by 1%, it would still be near those lows. However, rates are not expected to rise much this year. If they do, watching the pace will suffice. The tech-led rally should extend into roughly 2020.
【Dow Jones Industrial Average: 2018 projected range】
Bull case: 24,236–28,287 (year-end 2018: 27,996) / Bear case: 20,995–25,130 (year-end 2018: 22,790)
【Dow Jones Industrial Average: January projection range】
Bull: 24,235–25,575 / Bear: 23,575–25,130
【S&P 500: 2018 projected range】
Bull: 2,614–3,107 (year-end 2018: 3,076) / Bear: 2,255–2,734 (year-end 2018: 2,419)
【S&P 500: January projection range】
Bull: 2,614–2,763 / Bear: 2,559–2,734
【Nasdaq Index: 2018 projected range】
Bull: 6,747–8,375 (year-end 2018: 8,282) / Bear: 5,348–7,199 (year-end 2018: 5,702)
【Nasdaq Index: January projection range】
Bull: 6,747–7,201 / Bear: 6,507–7,199
【U.S. Treasuries trading strategy】
Maintain the strategy of shorting the 2-year and going long the 10-year to bet on yield-curve flattening.
【Japan stock market overview/analysis】
Last year’s Nikkei average fell at year-end, but still rose 19.1% for the year. This year is the Year of the Dog, and market adages say “the dog laughs.” However, applying the 12 Earthly Branches to stock cycles feels odd. Many market participants still expect solid gains this year, with optimists among them. When the mood is strongly bullish, markets can move in the opposite direction. So what will happen this time? The backdrop is corporate earnings. If not a sharp yen appreciation, earnings prospects should stay positive, and valuations may not look stretched. Ultimately, prices are driven by earnings. The Nikkei ended near 23,000, but that seems temporary. If earnings revisions continue higher, market sentiment should improve and prices will move higher. Markets appear to fear North Korea, but for those who understand the background, reacting to such headlines seems silly. The market’s essence must be observed. Foreign investors turned net buyers for the first time in a while at year-end. Whether this trend continues is crucial. Another key risk is political instability, which foreign investors hate the most. Previously, political volatility contributed to stock-price swings; with Abe’s long-standing administration, foreign investors derive comfort from continuity. In that sense, Abe’s continuation is essential for Japanese equities to stay firm. While there are risks like BOJ Governor Kuroda’s potential departure, policy is effectively determined by the government. These factors aren’t major issues; rather, Abe’s future is the key to Japan’s market trajectory.
【Nikkei futures trading strategy】
【Nikkei futures trading strategy】
The 2018 ranges are stated here as provisional. Once today’s opening price is determined, final figures will replace them. Today’s opening already exceeded 23,000 in the Chicago market yesterday. If the close can exceed 23,000, it will break the year-end stagnation and the mood will improve rapidly. The core strategy for Japanese stocks remains unchanged: stay long. This year, buying below 22,500 remains favorable. Be prepared to buy dips while waiting for further upside. The single most important point about Japanese stocks in 2017 was the shift into a historically major bull market. We have entered the “22-year rising cycle.” The years from 1968 to the 1989 asset bubble peak were a rising 22 years; the years 1990–2011 were a falling 22 years. Now, having bottomed in 2012 and risen, we have entered an “up 22-year” period. The “22-year curse” is broken, and a true bull market is underway. Will the next high occur in 2033? Will the price targets for U.S. stocks in 2028–2029 be surpassed well beyond the 2020 Tokyo Olympics? In any case, this is an extraordinary market. In such a historic turning point, the earlier you participate, the better.2018 projections are provisional. The final numbers will be set once today’s opening price is determined. Today’s opening has surpassed 23,000 on the Chicago market yesterday. If the closing price can exceed 23,000, the market will break out of late-year stalemate, and sentiment will improve rapidly. The basic strategy for Japanese stocks remains unchanged: stay long. 2018’s trading approach suggests that buying below 22,500 remains a favorable tactic. We will wait for further upside while buying dips. The most important takeaway from 2017 for Japanese stocks was the transition into a historic bull market, entering the “22-year uptrend.” The next high could be in 2033, and perhaps even exceed the high targets for U.S. stocks in 2028–2029. Regardless, this is an extraordinary market, and in such a historic turning point, early participation pays off.
The biggest risk, in my view, is Prime Minister Abe. If health issues resurface, it could destabilize the ruling coalition. There is a lot of information out there, and describing it in a single paragraph is difficult. If you read the context, you’ll understand. Abe is said to be in a position of one-man rule with no clear successor. Some say “the position makes the person,” but at present replacing Abe would not be easy. The reason for focusing on Abe’s health is partly due to information sources, but for foreign investors in Japanese stocks, this is the top risk.
The biggest risk is Abe’s health, in my view. If health issues resurface, it could shake the government’s foundation. There is a lot of information circulating, and describing it in detail is difficult. For now, Abe’s continued leadership is crucial for the stability of Japanese equities. However, Japan’s stock market has entered a long-term uptrend. When prices drop, buying on dips remains a prudent strategy. Also, the consumption tax hike in 2019 will proceed. There is no excuse to delay. When I spoke with Katayama Satsuki, a Liberal Democratic Party member of the House of Councillors, she also spoke similarly. She pointed to a potential economic downturn, but the party’s stance appears to be “it’s decided and cannot be changed.” Income tax increases are also problematic. Rather than increasing taxes, reducing taxes to further stimulate the economy may be preferable. Some say corporate wage growth is hampered by future uncertainty, but there is little use worrying about it now. Concerns about rapid rate hikes hurting BOJ finances could worsen the national finances, but those who understand the facts see no real danger. Japan’s finances are solid.
Now, the 2017 performance of the Nikkei 225 futures options exceeded 200% returns. This strategy is reported on the following “Nikkei 225 Options” trading strategy and already achieved 16.6% return for January 2018. If this pace continues, annual returns could reach 200%. This is the hallmark of option trading: a highly attractive strategy that, once learned, can be used indefinitely. It’s a pity that options trading isn’t more common in Japan. It is enjoyable to study many individual stocks to boost returns, but from a time-efficiency perspective, options trading is unmatched. Please consider it.
【Nikkei 225 2018 projected range (tentative)】
Bull: 21,780–26,806 (year-end 2018: 26,530) / Bear: 18,436–23,380 (year-end 2018: 19,083)
【Nikkei 225: January projection range (tentative)】
Bull: 21,780–23,542 / Bear: 21,511–23,380
【TOPIX: 2018 projected range (tentative)】
Bull: 1,756–2,143 (year-end 2018: 2,126) / Bear: 1,500–1,858 (year-end 2018: 1,554)
【TOPIX: January projection range (tentative)】
Bull: 1,756–1,879 / Bear: 1,711–1,858
〔CURRENCY MARKET〕
… continued from here
Tetsu Emori's Real Trading Strategy
Free! Account opening campaign
Monex FX USD/JPY 0.2 sen spread campaign with account opening, plus a 1-month newsletter and tie-up campaign (Tetsu Emori)
＊Seminar schedule
January 5 (Fri) Monex Securities – U.S. employment statistics seminar (WEB)
https://info.monex.co.jp/news/2017/20170502_01.html
January 9 (Tue) Seminar with Gaitame.com (Tokyo + WEB)
http://www.gaitame.com/seminar/1801/09_li_emori.html
January 18 (Thu) Himawari Securities seminar (WEB)
http://sec.himawari-group.co.jp/academy/seminar/#S20180118
January 25 (Thu) Togo Securities seminar (WEB)
https://togo-sec.co.jp/seminar/detail/5345?semi_bn
February 2 (Fri) Monex Securities – U.S. employment statistics seminar (WEB)
https://info.monex.co.jp/news/2017/20170502_01.html
February 17 (Sat) Okafuji Shoji seminar (Osaka)
http://clickfes.jp/2017/spinoff_vol1/
February 24 (Sat) Kanetsu FX Securities seminar (Osaka)
March 2 (Fri) Monex Securities – U.S. employment statistics seminar (WEB)
https://info.monex.co.jp/news/2017/20170502_01.html
March 3 (Sat) Toyo Shoji seminar (Tokyo)
March 24 (Sat) Toyo Shoji seminar (Chiba)
April 14 (Sat) Toyo Shoji seminar (Omiya)
May 12 (Sat) Toyo Shoji seminar (Fukuoka)
May 19 (Sat) Toyo Shoji seminar (Gifu)
May 26 (Sat) Toyo Shoji seminar (Kobe)
June 16 (Sat) Toyo Shoji seminar (Osaka)
July 7 (Sat) Toyo Shoji seminar (Hiroshima)
(In addition to the above, individual seminars are also held. If you’re interested, please contact us.)
＊Television appearances planned
January 11 (Thu) 13:30–13:45 Stock Voice TV “Tokyo Market Wide” (Tokyo MX TV)
http://www.stockvoice.jp/
January 25 (Thu) 13:30–13:45 Stock Voice TV “Tokyo Market Wide” (Tokyo MX TV)
http://www.stockvoice.jp/
＊Radio appearances planned
January 26 (Fri) 16:00–16:20 Radio Nippon “GO! GO! Jungle Market” (GoGoJunkan provided)
＊Regular contributions schedule
“Toyo Keizai Online” (irregular)
http://toyokeizai.net/
“Monex Mail” (1st, 3rd, and 5th Friday)
http://lounge.monex.co.jp/pro/special1/
“Monex Securities Monex Gold Report” (every Monday)
The sales page for Tetsu Emori's Real Trading Strategy is here
https://fx-on.com/adviser/detail/?id=8592
