Many traders are wondering if 2018 is going to be the year to take some money off of the table and play it safe just in case the market takes a turn for the worse.
While there is no way to predict exactly what the market is going to be doing by the end of 2018, we seem to be getting some pretty clear signals regarding what the market is going to be doing at the beginning of 2018 — climbing higher.
So is it time to take some money off of the table? Only if you need it to remodel your kitchen or buy that fishing boat you’ve had your eye on. Otherwise, keep your money in the market, which is poised to continue adding to its spectacular 2017 gains — at least for now.
Here are a few reasons why the market is likely to continue moving higher in the near term.
Rising Margin Debt Levels
Margin debt is a measurement of the amount of money traders on Wall Street have borrowed to buy stocks. According to the New York Stock Exchange (NYSE), traders have been steadily increasing their margin debt levels throughout 2017.
As you can see in Fig. 1, traders started the year with $513 billion in margin debt and have increased that amount to $580 billion as of November (we won’t get the December numbers until the end of January).
Traders don’t lever up their trades by borrowing money unless they are confident that the trade is going to move in their favor. This steady increase in margin debt levels tells us that traders are as bullish on stocks as they have been in years, and there are no signs of that changing in the near term.
The anticipation of tax reform spurred the market higher in 2017, but the party isn’t over. Tax reform has the capacity to continue boosting stock values in 2018 in the following ways:
- Lower taxes will lead to stronger earnings per share (EPS), which will push stock prices higher even if traders don’t increase the price multiples they are willing to pay.
- Merger and acquisition (M&A) activity will likely pick up, as companies will have more money to spend on inorganic growth, which means that the supply of available stocks on the market will decrease, pushing prices higher.
- Share-buyback programs will likely expand, which means that the supply of available stocks on the market will decrease even further, pushing prices even higher.
- Dividend payments will likely increase, making dividend yields more attractive, which will increase demand for those stocks, pushing prices higher.
The Trend Is Your Friend
If you hang around Wall Street long enough, you’re bound to hear clichés like “The trend is your friend” and “Don’t fight the market” more times than you’d care to remember. However, there is a reason these statements have become clichés … they’re correct.
Just take a look at the daily chart of the S&P 500 in Fig. 2. That is one friendly bullish trend.
And it only seems to be getting friendlier as it accelerates to the upside.
The Bottom Line
Naturally, this bullish era on Wall Street will eventually come to an end. It has to. It just doesn’t have to come to an end anytime soon.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.