Financial Research, Education & Data
Below are Fred's Weekly Reports with a brief synopsis of each. To view the full report, click on the title.
Stocks are, once again, challenging the 240 area on SPY and heading for the 241 area, our breakout number. SLX has pulled back to test support in the 36 area and has started to rally.
This week is important and may give us either the breakout above SPY 241 or breakdown below SPY 230 to suggest the market is leaving this range. Last week’s trading in oil was positive, and it looks as if a bottom has been put in. We have preferred larger money center banks for a while, but the charts suggest caution throughout the sector.
We are still bullish and are not surprised that SPY is hugging 240 during options expiration week. While there are some things wrong with the market (there always are!), our parameters are still the same – above 241 on SPY sets up a strong yearend, and a correction from here that moves below 230 either now, or after a breakout above 241, would make us less bullish. Oil has closed above $48/Bbl giving us a buy signal in the key seasonal timeframe. This should test $52 to $54, and if through here our forecast price for the year remains $67.
We have suggested that the bottom of the correction has already occurred but the confirmation we have been looking for - a close on SPY above 241 – has yet to occur. Additional confirmation would be if oil can close above $48/Bbl, as this should kick energy into gear. This week is options expiration.
European markets still look attractive technically and Developed Markets still look strong. SPY has not made new closing highs, although other indexes have traded up. Until this occurs, the low we have been looking for in May is NOT confirmed.
This is a make or break week for the market. We are still waiting for SPY to make a new CLOSING high to suggest the second half rally has begun. The message from these charts is that bonds could be much weaker in the second half, than most people believe.
Oil prices are ready for a bounce in this downtrend, but that any low made here will probably be retested. Buy some of this in the 48-area and look for a bounce then a retest to add the rest. 48 is a good price to add the first bit. On UGA, we hope for a down open and would buy UGA if that happens. Ideal price would be 24.02, just above 24.
There is an excellent chance that the bottom we have been looking for in May has occurred early, but as we mentioned on our conference call this is not confirmed until SPY can make all-time highs. The March 27th low must hold on SPY (231.61), and preferably on all indexes.
Unless the low of the consolidation on SPY breaks, we expect a test of 247. On a new high in SPY, the low at 231.61 should be the low for the remainder of 2017.
There are some definite bottoming signs; so today we discuss some steps we might take for a strong second half. Income investors should continue to have a position in REITs. One of the interesting features of last week’s decline in oil is that the weekly stochastics on oil and gasoline are still in positive mode, while the two equity ETFs are barely above 20 giving preliminary buy signals. This implies that there could be a decent move up in these instruments now that seasonal weakness is ending.
We would sell some, or more, TLT on an up open, and hold the rest for 126. You can raise stops on the last bit of the position to 123.40 or so. 124 should hold.
The market has put in a bottom during options expiration and we expect some sharp up and down movement this coming week. Use the downdrafts to start to take positions for a rally in the second half of 2017.
Stocks continue their pattern of “going aggressively nowhere”, and we expect this to continue for a while, perhaps even through options expiration next week. We continue to believe that TLT should move through the 123-area resistance and challenge 126 – 128 by the end of May.
Stocks were interesting but little changed last week. The weekly stochastic remains in sell mode, and is starting to recycle without much price decline, at least so far.
So far, stocks have acted about as expected – up and down with no net gain or loss.
Has the correction ended? This is possible, but we do not think so. A move below last week’s low in the 232 area on SPY would confirm more corrective behavior is underway. TLT is still in a base, but the weekly stochastic buy signal is not giving much and often this type of formation leads to aggressive selling when the buy signal peters out.
SPY has held the 233 support area after gapping below it. We should enter some orders in as “wish list” pricing, down 8% – 10%. we are maintaining our 124-area target for GLD mentioned in our yearly forecast piece.
Over the last month, we have been suggesting that as the new administration and Congress try to pass legislation, there would be bumps in the road, and that this would spark corrective behavior. The technical indicators support this scenario. If SOYB starts trading around 19, then we would buy either DBA or SOYB and hold through the end of June/beginning of July. We think developed markets, especially Europe, could do better than emerging – and we do note, once again, the strong accumulation model buy signal in EFA to bolster this view. We rate emerging markets a hold, and cautious advisors might want to take some steps to manage risk in this area.
We still believe there is an excellent chance that TLT rallies into May and the stock market drops.
Our forecast has been some market difficulty as legislation is proposed and fought over, and this should be over by May in our view. TLT has support in the 116 to 117 area and this has been fully tested. Resistance is now the 122 to 123 area, and while 126 or so is still possible the potential for this buy signal really ends in May.
The chance of a bond rally (not decline) is higher than usual because technical indicators on bonds, preferred bonds and other alternatives look like they have come down in anticipation of the Federal Reserve move to raise interest rates. DBC gapped below the key 15-area support on Tuesday, but closed on its highs. We would hope that this moves back above 15 on the interest rate news. If not, a test of 14 then 13 is possible, and this could hurt equity markets.
Small Cap indexes have started to lag large caps, and this is not widely acknowledged or discussed in the popular press. Yet, as we have seen, this can lead to corrective behavior. Institutions are selling off their speculative, lower priced securities.
Stocks have started to pull back, and the SPY now has a daily stochastic sell signal.
We expect the market to see some pullback here, and if this occurs, we will likely move these to more aggressive ETFs. How far can a projected pullback go? Ideal would be 220 – 216 on SPY, but the important thing to do is watch the indicators. Gold’s long-term Trend system is in danger of going negative, a bit of a surprise.
Our concern is that as legislation hits congress the Trump optimism could fade and the market correct. At the same time, bonds could rise into a peak around April/May.
We have been looking for a rally in equities that peaks at the end of February or so and then a short-term correction. We have posited that the driver of this pullback is that the current market is priced for perfection, and in fact the new administration will not be able to get all of the legislation they want. TLT rallied back to the122 area resistance last week, and we continue to believe that 126 – 128 can be tested before the next down leg occurs.
The narrowest index is up the most, but there is not huge dispersion in the rest of the market. This quick look tends to confirm our view that a correction is possible, and we are set up defensively in models but will change that should the market pull back. There is nothing in the energy charts suggesting excessive weakness or strength – Energy still looks like an equal weight to us for now. One of the most interesting things to come out of our Global Accumulation Model analysis was a strong accumulation buy on EFA (iShares® MSCI EAFE Index Fund). This is the first such signal to come along in many years.
We have not advocated selling into this rally as of yet, but will if we hit the SPY 240-area. For now, enjoy the ride, but look for problems into the end of February – beginning of March.
Last week closed well, but there are some signs, particularly in the sentiment indicators, that suggest moving slowly to a more cautious stance. We are still looking for a strong finish to February, but some caution flags are now out. One of the surprises of 2017, at least for some, has been the strength in Emerging Markets. This has been due at least in part to a weaker dollar, but the main reason, in our view, is that markets like China and India have perked up over the last bit of time.
So far, equity markets are trading sideways to up, and bonds are trying to rally. GLD is a bit overbought short-term, but the chart remains attractive on an intermediate and long-term basis.
Assuming we get a drop into May, we will look to take a more aggressive stance at that time. This could be a good year for DBB.
Our short-term stop on SPY is now 224.50 – below that and lower prices can occur. But, we think we will see a better opportunity for a short-term top in late February.
This week should be an up week, and then we would expect some signs of weakness starting around the end of next week. Bonds are, once again, at a key juncture.
We have received some questions on insider selling and financials, as well as the question as to whether we should sell some of our financials in the hope of buying them back in the spring.). EPHE, an alternative to China and Japan, has a solid double bottom in place, and a move above 36 would target 40.
Our forecast has called for a rally into the end of January and into February, followed by the potential for a decline in the March – May time period. So far, I see nothing that suggests this is a mistake. The Accumulation Model on Utilities is now the third best model of the 11 sectors, and the most improved over the last month.
We expect the market to advance after January 20th, and peak in February or early March. Since it is fairly clear that Yellen and Trump are not “bosom buddies”, and there is not a lot of clarity around how the FED is going to actually normalize rates, wouldn’t it be interesting for them to act a bit under the radar and blame any fallout on Trump?
Both XBI and IBB have rallied off the recent low, and are now overbought. They could still test the top end of ranges (IBB 300, XBI 70) but even if they are going to go through they are likely to pause and consolidate. SLX has support at 33 – 38 and resistance around 45. We would continue to buy it.
We continue to believe the market should rally into the end of January before risk of a correction. One of the drivers of success in 2017 could be properly timing a switch into growth. In 2017, we are looking for oil to break out of this range to the upside and to test 64 – 65 area and possibly higher.
The market closed out the year in oversold territory on many of the short-term indicators, suggesting the start of 2017 will be in rally mode. The next set of overbought readings on the daily indicators will coincide with overbought weekly and monthly indicators, and this may produce more severe corrective behavior. Expect this around February 1st. While some sideways and choppy action over the next couple of weeks would not surprise us, it is likely that bonds will rally from here and get at least weekly indicators overbought again.
Since we wrote about our yearend outlook in the weekly we have sort of a fun idea suggested by some clients, of some ETFs that could do well in 2017. So, we have picked six ETFs that we would consider including in portfolios.
Overall, the price structure on the major indexes still looks positive. TRADERS might very well want to buy TLT (Barclays 20 Year Treasury Bond iShare) or TLO (Barclays Long Term Treasury Bond iShare) here for a bounce. The reason for this is that the stop losses are SO close that risk is low. This is a two-week trade that should be closed out on December 30th.
Our thesis has been, and continues to be, that dividend paying stocks and bonds are not correlated over the long run. Income investing is likely to become a “cocktail” of various instruments in a rising rate environment, and Converts and Tips could be decent components of the mixture. Normally, gold would be rallying on inflation fears, but in this case it is not. Our best guess is that the market is suggesting that inflation will be under control for at least the first part of the Trump economy.
We continue to look for some sideways and choppy behavior to reload the daily stochastics on ETFs such as SPY, DIA, and QQQ. We reiterate that we expect the European Union to come under pressure, but for us this is bullish, and not bearish, as others seem to think.
While the market should continue strong at the very end of the year, we would expect this week to be choppy to down as the daily stochastic recycles. This should be more of a time correction and less of a price decline. We are not selling this move, as surprises could occur on the upside. The technical message is clear – the risk is for higher rates, most likely after at least some kind of monthly bounce, then rates should resume their climb.
We maintain our objective of 223 on SPY but would not be surprised to see 218 before this is struck. The IXG suggests that the results of the Italian referendum should be good, not bad, for international banks.
We are close to our target of 223 on SPY by yearend – but we may not hit it without an intervening pullback. Technical Indicators on TLT and other fixed income instruments suggest that the recent bond decline may be overdone and due for a bounce.
Stocks continued to rally a bit, but really last week consolidated recent gains. We expect that TLT should mount a rally attempt here and will watch with interest to see how this goes. A rally in Turkey (TUR) here is possible, but unless it can move quickly above 34.50, then 37, the rally is unlikely to have legs.
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