The stock market is behaving quite volatile again. Moreover, an intermarket rotation has started recently: some underperformers start leading, and former leaders show first signs of suffering. That said, did our stock market outlook for 2017 change compared to our previous bullish outlook?
First and foremost, in order to determine the answer to this question, we remain focused on key price levels on the chart(s), combined with sentiment, both fundamental components of our thesis. As outlined in a recent piece, we do not expect a stock market crash in 2017. On the contrary. But we should always be on the outlook for changes in trends; a bearish scenario would kick in if the S&P 500 would breach the 2000 level and, ultimately, the 1850 level. Moreover, a failed breakout to new highs in the coming few months would invalidate our bullish view for 2017.
The mainstream expectations, which we consider an important barometer for sentiment, is somehow mixed but certainly not overly bullish. Goldman Sachs sees a neutral stock market outlook for 2017 with a slightly bearish bias. Similarly, according to a survey by Reuters among equity specialists, their stock market outlook is, on average, neutral. This MarketWatch piece has an even more bearish stock market outlook.
The general sentiment is indeed slightly bearish to neutral. In other words, we should not exclude a strong rally in 2017, potentially one last peak before the secular bull market dies.
Apart from the broad market stock market outlook, we observe something much more important: sector rotation. In particular, some sectors are breaking out, and suggest that sector picking will be a key success factor when it comes to the stock market outlook for 2017. Moreover, some specific commodities are showing extremely strong price action recently.
Bullish outlook for 2 stock market sectors
One sector which broke out very recently is the financial sector; banking and insurance stocks are benefiting from rising rates. We saw that coming in the summer of this year, as we wrote Financial Stocks Will Be Outperformers In 2017. Our readers did benefit from that forecast.
The relative strength of the financials sector to the broad index (S&P 500) confirms our viewpoint, as seen on the first chart. That breakout was in the making for many years, so it has a very high importance.
The Industrials are seemingly benefiting from Trump’s victory, as Trump has clear plans to renew public infrastructure. Whatever the ‘reason’, Industrials have been performing quite well for many years, and their recent price action has only confirmed their bullish outlook for 2017.
Bullish outlook for base metals & mining stocks
Some specific base metals have performed spectacularly well recently. Think of copper, which we have covered extensively in recent weeks, and for which we forecasted the ongoing breakout. The base metals sector as a whole is breaking out from its secular bear market, as shown on the next chart. Of course, we need at least one or two weeks of trading above the bearish trendline to get a confirmed breakout, but base metals look quite bullish at this point:
- zinc is the most bullish base metal, both on the short and long term horizon
- copper looks extremely strong short term, and could be engaging in a secular breakout (if it remains above $2.50)
- aluminium, lead and nickel are all bullish short to medium term, but not yet long term
The safest way to play the base metal uptrend is to choose miners with the most bullish chart setup as well as strong financials. Those stocks will do exceptionally well unless the stock market collapses, which we do not anticipate.