Week Ahead: Bitcoin To $25K By 2018? Stocks At New Highs By Xmas?

The NASDAQ jumped 1.43 percent last week, hitting its first record since November 28 on Friday, advancing 1.15 percent. It has hit more record closes this year than it ever has before according to LPL Financial. In total the tech-heavy index has made 70 new highs in 2017, topping records set in 1980 and 1999. The index gained 29 percent this year so far, its best annual performance since gaining 38 percent over 2013 and performing better than it has over the past 3 years combined (+ 11.80 percent in 2014; +6.04 percent in 2015; +7.41 percent in 2016 for a three-year total of 25.25 percent). This past year also represented its sixth consecutive year of gains – the longest winning streak for the index since the one that ended in 1981.

The Russell 2000, while advancing 1.39 percent on Friday, gained only 0.48 percent for the week, forming a High-Wave candle, following a Bearish Engulfing Pattern. The small cap index has the fewest records, with 23 so far this year, among all US major indices.

It's up 12.5 percent so far this year, paring 14.82 percent gains during the past week and 13.63 percent from the prior week’s closing price. Of the annual 12.5 percent gain, more than half—6.4 percent —occurred during September alone. That's the result of two major obstacles to US President Donald Trump's tax reform agenda being cleared during September: On the 19th Senate Republicans abandoned a key fiscal doctrine, to agree to a budget that would not add to the federal deficit, in order to pave the way for a $1.5 trillion tax cut over the next decade, which then allowed Congressional Republicans to embrace the massive tax cut; subsequently, on September 27, Trump finally revealed the details of his tax policy.

The plan included the most sweeping tax overhaul in decades and the President promised it would be the biggest tax cut in history. The Russell 2000 jumped 2.00 that day. Still, it is strange that the index whose listed companies are considered to be the biggest beneficiaries of tax cuts has preformed poorly recently and indeed was the worst performer during the past week. Moreover, the tech-heavy NASDAQ, which includes tech firms considered to be left out of the tax reform benefits since they are already paying a lower effective tax rate, climbed Friday by significantly more than the Russell 2000.

As the impending tax reform legislation heated up, investors began rotating out of technology shares and into financials. Since September, when tax reform became a real possibility, financials—which, as we've discussed numerous times—have the most to gain, have outperformed all other sectors, by 12.27 percent, while technology shares added only 9.91 percent. Over the same period, the S&P 500 gained 'just' 7.02 percent.

In the past month, Financials outperformed, advancing 6.23 percent, almost tripling Tech stock gains which were up 2.67 percent. During this same time the SPX itself almost doubled technology's performance, +4.34 percent. Along with tax reform helping boost Financials, the Tech sector's jaw-dropping 33.50 YTD performance, which was almost double Financials’ 19.61 percent, made the sector ripe for a correction. Of interest, thus far in 2017, the Financial sector's YTD gains are almost identical to the S&P 500’s 19.52 percent.

The Fed’s third quarter point rate hike for the year this past Wednesday was universally expected. However, the central bank's maintaining its rate outlook for 2018, an additional three hikes and no more, disappointed investors who were hoping for a faster path to higher interest rates, which would have matched the Fed’s improved outlook for economic growth. Investors sold out of Financials, backpeddling into Tech. While technology shares led the benchmark with a weekly 1.51 percent gain, financial firms retreated 0.81 percent.

The European Central Bank kept its key lending rates and its bond-buying program unchanged at its December meeting this past Thursday, but raised its growth and inflation forecasts through 2020. Government bonds in the eurozone saw modest price declines following the news. For the week, the German 10-year bund yield was little changed. According to Reuters, however, the additional yield offered by the U.S. Treasury 10-year note versus the bund neared its widest level since April. Italian government bonds sold off on political uncertainty after Italy set March 4, 2018, as the date for its general election.

After raising its bank lending rate for the first time in 10 years in November, the Bank of England (BoE) kept its bank rate unchanged at 0.50% at its December meeting on Thursday. UK inflation rose at an annual rate of 3.1% in November, higher than expected and the fastest pace in more than five years, but the bank’s policymakers noted in their statement that they believe inflation “is likely to be close to its peak” and will return to the BoE’s 2% target. In the meeting minutes, the central bank also noted the recent progress on Brexit negotiations, saying the chance of a disorderly exit from the European Union has decreased. Yields of UK government bonds declined.

China has been tightening its massive monetary machine since late 2016. A batch of recent economic data show that China’s growth slowed last month. Further tightening by its central bank, the PBoC, could mean the second largest global economy might be entering the slowdown investors were expecting a year ago, after this year's shockingly unexpected strong performance.

As the world’s biggest commodity purchaser and user, the latest commodity selloff was spurred by these recent reports which signal a Chinese cool down. And of course, falling commodities drag down commodity producer shares, further hampering markets worldwide. A sharp slowdown could ultimately trigger a global stock crash.

A special mention should go to cryptocurrencies in general, and Bitcoin in particular. What started as a gimmick at best, or perhaps a tool for money launderers and criminal syndicates at worst, has become a fully legitimate asset class with the start of Bitcoin Futures trading on the CBOE, and this coming week when the largest options exchange worldwide, the Chicago Mercantile Exchange Group, CME, begins trade of its own official Bitcoin futures contracts, on December 18.

For all the excitement about the NASDAQ and the SPX Technology sector outperforming, that's chickenfeed compared to Bitcoin's 1,924.40 percent rise.