Bring Out the Pitchforks … and the Champagne!

First there was the Trump election. Then there was the Trump rally.

Will there be the Trump bull market?

After all, a Trump bull market would certainly fit nicely into his "Make America Great Again" mantra. Why not start with the stock market?

I lean toward saying yes, there will be a Trump bull market. But only ever so slightly.

My gut says the U.S. economy and the global economy are in for a rude awakening … that is, IF policymakers cannot manage the financial system through this transition.

And by "manage the financial system," I mostly mean "manage the confidence of financial-system participants."

And therein lies the challenge …

The U.S. dollar hit a 14-year high last week. So, the potential for major stress on dollar-based debt-holders around the world is growing increasingly difficult to avoid.

And even though U.S. stocks have done rather well in the 10 days or so following the election, emerging markets in particular have not fared so well.

And that necessarily leads us to where it leads everyone else. That is, trying to determine the odds for a Federal Reserve rate hike next month.

This is already factoring into U.S. dollar strength. Which in turn pushed the euro, yen and gold sharply lower in recent days.

If things continue this way, the impact the dollar is having on all currencies could come back to haunt the U.S.

Think of it as emerging-market contagion. When capital flows back into dollars, emerging-market economies suffer a double-whammy. It comes in the form of higher costs to finance debt, and less capital to drive economic activity.

It doesn’t take long for that to become a vicious feedback loop … one that shocks investor confidence and shakes up the global financial system.

But maybe you already know all that. Certainly I’ve discussed the dynamic more times than I can count.

So why on earth am I leaning at all toward an imminent Trump bull market?

Biding Our Time?

Listen.

I am not an advocate for policies that simply aim to restore the "capitalist" forces of one, two or even three decades ago.

I’m all for free markets, really.

But restoring the system that got us here is not the answer to our long-run questions.

After all, policies meant to enable measurable "growth" inevitably must encourage a willingness for more debt.

However, that doesn’t mean anyone is listening to me. But it also doesn’t mean restoration of policies that encourage "growth" will be avoided. Precisely the opposite.

It appears tax, regulation and trade plans are ultimately going to be put in place that foster a lot of the buzzwords we’ve come to believe are reasonable, if not ultimate, goals: job-creation, tax cuts, wage growth, free markets, etc.

Again, I am not against those things. I’m especially not against letting the market process dictate economic activity and the flow of capital.

What I am against, at this point in the lifespan of the U.S. economy, is policymakers obsessed with growing growth for the sake of growing growth … rather than for sustaining a system that’s already delivered a quality of life that’s unparalleled in history.

What policymakers and elected officials struggle to realize — or to remember — is that the growth model that got us here is exhausted. Debt saturation has made growth necessary but hazardous.

Necessary because we have to somehow find a way to pay for the mountains of existing debt. Hazardous because more debt is really the only conceivable outcome and will end badly.

With that in mind, let’s look to answer my original question …

Why am I leaning toward a Trump bull market?

Part of the answer includes the potential for Trump’s "restorative" policies to pump some life into the economy and stock market in the near term — say, one to two years.

But to get the full picture, let’s revisit a long-term chart of the S&P 500 that I’ve flirted with in these pages a couple times over the last 12 months or so.

The red dashed lines I’ve drawn in there resemble a pattern from decades ago that lined up rather perfectly with the long-term bull market we’re staring at today.

It suggests this:

First, stocks are due to slide as part of a longer-lasting consolidation.

Second, the consolidation would allow a build-up of energy to drive a new breakout and put an exclamation point on this bull market.

The Pitchforks are Out!

And that’s not just symbolic of Trump’s election.

If we zoom in on the S&P 500, a drawing of Andrew’s Pitchfork argues for the further consolidation before the final bull market breakout.

Andrew’s Pitchfork is a three-line, trend-channel tool. A trend stays in place as long as the ‘pitchfork’ channel holds.

BUT …

What if the Trump bull market were to begin even sooner?

We don’t have to compare today’s pattern with that of 60 years ago to argue for an imminent and significant rally.

Let’s just look at the earlier part of this bull market for clues …

If you’ve even dabbled with Elliott Wave analysis before, you’ll recognize the three-wave and five-wave price patterns in the above chart.

The corrective waves II and IV are similar three-wave patterns. If the long-term five-wave pattern unfolds as expected, it would mean additional 18% upside over the next year and a half for the S&P 500. That’s quite the honeymoon.

Viva la Trump rally.

Do right,
JR

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…