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Stock strategist who noticed marketplace correction now predicts 10% to 14% rally — and a fizzle in 2019

The bull marketplace remains to be alive. That could be just right information any time, however particularly after Monday’s buying and selling, when the Dow Jones Industrial Average gave up an intra-day 352-point gain to finish the day with a triple-digit loss. It was once the biggest intra-day reversal for the Dow in additional than 8 months.

To make sure, predictions are a dime a dozen on Wall Street. But there’s a particular explanation why to hear this one: It comes from Hayes Martin, president of advisory company Market Extremes, who in early October hit the bull’s eye (or will have to I say “bear’s eye”) in predicting an coming near near correction during which the marketplace averages would drop between 8% and 13%. (See chart.)

Martin’s newfound bullishness derives from marketplace divergences, which satirically was once one of the vital number one causes he become bearish a month in the past. Then, you might recall, the divergences had been negative: key teams of shares weren’t taking part within the new highs posted via the foremost averages.

Today the divergences are bullish: As the foremost marketplace averages such because the S&P 500

SPX, -0.66%

  had been hitting after which trying out new correction lows, fewer and less shares have participated.

Consider the Nasdaq 100 index

NDX, -2.02%

 in Monday’s buying and selling. While it was once down sharply, cumulative internet new highs (new highs minus new lows) for the Nasdaq 100 was once sharply upper, and has been trending upper for a number of days now.

A an identical divergence was once obtrusive for the larger-cap shares. While the cap-weighted S&P 500 on Monday was once down 0.66%, the equal-weighted S&P 500

RSP, +0.04%

  was once up 0.04%.

The different primary explanation why Martin has grew to become bullish is that more than a few measures of marketplace sentiment level to excessive pessimism, which is bullish from a contrarian view. One of the symptoms to which Martin can pay specific consideration to is the Inverse ETF Volume Ratio (IEVR), which measures the relative acclaim for inverse ETFs. Such price range are the “easiest way for investors to play the downside,” and their quantity due to this fact is a superb measure of investor sentiment.

“Recent readings [of the IEVR] are by far the highest in history,” Martin stated in an interview, “and indicate a tremendous surge in pessimism.”

How giant of a rally does Martin envision? His very best estimate is between 10% and 14%. Note that such a rally could be sufficient to push the foremost marketplace averages again above their all-time highs of previous q4. But simplest slightly.

That’s as a result of Martin’s research leads him to consider that “an important market top lies ahead, quite likely in early 2019.” So the rally he envisions is not going to “lead to a strong new leg to the bull market.”

Related: Stocks could rally 20% after this bruising rout, says Guggenheim’s Minerd — after that, be careful

Why does Martin now not envision a robust new leg of the bull marketplace? The greatest causes, he informed me, are that the “tailwinds” which during the last year supported upper prices — the impact of tax reform, essentially — will quickly deplete.

The base line? While you shouldn’t be stunned via a formidable rally in coming weeks, don’t get complacent. It is not going to amount to a lot more than “a powerful trading bounce.”

For additional information, including descriptions of the Hulbert Sentiment Indices, move to The Hulbert Financial Digest or electronic mail .


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