These big ups and downs are bear market action. Until this type of action stops, we would continue to spend cash sparingly. The one concern we have in commodities is that accumulation models in USO and UGA suggest that these low prices will last for a bit, which in turn suggests oil stocks are not candidates for recovery.
What do we want to see in the equity markets, to be more confident we are in a bottoming area? It looks like today will be the sort of day we would like to see, with a down open, and trading in a more sedate matter. Consolidation in this area and some up and down moves would be ideal.
The first bounce was roughly a 50% retracement, and the short-term retest has held, making a higher low, and suggesting this coming week could see a fairly nice rally despite the limit down this morning on equity indexes of -5%.
Tuesday’s decline is part of this pattern, one that will hopefully lessen the bullish sentiment we have seen over the last few years. Market Vane % Bulls has moved over 70% on bonds, a sign that this market may be getting too bullish, but really 78 to 80 is where we would be concerned.
A double bottom has larger chance of occurring than a “V” bottom. If this pattern holds the way it should, then we would assume five to eight weeks from the first low until the second. GLD has likely peaked for the year, unless that high is exceeded. One thing about this week that is interesting, but has not been remarked on much, is the performance of the Chinese ETFs. These outperformed the US last week.
Understand we are NOT intermediate term bearish and would view such a decline as a buying opportunity. We have been underweight this sector for over a year and keep looking at it with a view toward changing our rating but the signals never materialize.
We could see some choppiness into the end of February or even March. However, we would add money to models slowly through that time, as this is no means assured. As far as bonds go, they are beginning to fail at our projected resistance, and the same with gold. GLD may be the riskiest here because our accumulation models suggest a quick drop.
SPY is declining about as we have expected, and the 320-area is being tested as we speak. Ideal would be a small bounce and then a test of the 315-area we have mentioned, but that could also be tested right away.As stocks pull back, TLT has rallied to the top end of the range, but there is glaring non-confirmation from the accumulation model, which suggests this move could be retraced.
The first consideration is to reiterate that, aside from overbought trading indicators, the technical picture of the market is fine. The other thing to remember is that in a bull market pullback not all stocks and ETFs decline with the market. Examples here already include SPLV and AAPL.
There continue to be signs of a sharp pullback in stocks, and we have suggested this could occur in February. This would result from overbought conditions and not any sort of fundamental condition, in our view. Two areas we think could be strong in 2020 are Transports and Financials.
Stocks have continued to rally this week, with SPY up 0.56%, and we have no change in our market opinion as elucidated in the Weekly Review. IIPR remains our favorite Marijuana stock for conservative investors, and CRBP is our favorite for speculators.
The daily stochastics need to recycle, and this could occur more in time than price. With sentiment indicators where they are, and some of our volatility indicators suggesting a sharp decline is possible, we lean toward a more volatile move. We would use rallies in LQD and TLT to sell, and switch to dividend payers or preferred stock ETFs, which should do better in 2020.
Note that we still expect stocks to pull back in February and not now, although this surprise may be the fundamental development we needed to recycle daily and possibly weekly stochastics. In terms of WTI prices, 63 to 67 is resistance and if that is exceeded a test of our target of 72/bbl is likely in the first part of the year, rather than the second part of 2020 as we originally thought.