Dividend stocks should outperform bonds over the next 12 months. Through 32.50 resistance would likely turn the chart of TYX from bearish to bullish and lead to a rise in rates, with TYX likely to challenge 40, then 47.50.
The markets are in an interesting configuration here at the start of November. Monthly indicators did not reset for October, and suggest a short-term peak is possible. Daily stochastics on SPY are now in sell mode, suggesting they could recycle. This is a trading oriented indication only for us – the outlook into the end of the year remains positive.
We have had some questions about why Biotech dropped a bit, and believe it is because these indexes were already at resistance when the good news hit. Watch DBC carefully – we expect more advance but the pattern is difficult.
We believe it is a good time to look at some of the higher momentum ETFs for a run into the end of the year. Our interest rate forecast is for rising rates into yearend, and because of this we often get questions about the effects of a rise on municipal bonds. These charts suggest that the municipal bond ETFs will outperform Treasury ETFs on a rate rise.
We have had SLX in our portfolios since before the 2016 election, and it has had a more difficult year than we expected. Still, the technical condition is ripe for an advance into yearend.
We continue to see evidence that the broad market is improving – New Highs/New Lows continues strong, and the weekly advance/decline line continued to make new highs. Breadth momentum indicators are near the tops of ranges but set up to move higher. Our oil forecast for the year has been for a move to 67 by yearend – which now seems to be a bit out of reach or too big a move. We still think the mid-60’s are possible.
We continue to like the market into yearend, but right now daily stochastics are overbought so we would not be surprised to see some pullback. We are buyers, and not sellers of XLV, XBI and IBB into the end of 2017, especially on a dip for October expiration.
In blue chips, there is still dominance from the very top large cap stocks but we are starting to see some of the smaller names come on. Those advisors who have been on the fence regarding a commodity position in portfolios should consider this now – the train may be leaving the station.
USO has generated a short-term buy signal that should help XLE and PSCE. TLT is interesting as it tried to rally and had a reversal bar. It could end up weakening from here. The strong performance of dividend stocks, as measured by SPHD, is important.
Many have suggested the market is overbought. While daily and weekly FPO’s are stretched and that we could see a choppy, negative week sometime in the next few weeks, this still looks like a “good” overbought situation rather than the end of this advance. We believe a move by TYX above 32.50 will suggest the bull market in bonds is over.
We have no surprises so far this week in the U.S. equity markets. XLI and XLB have made new highs while IYW is lagging. The daily stochastic on GLD is very oversold while the weekly is still dropping down to recycle. There might be a bounce here but we are still trying to add GLD back around 117.
Major stock indexes, including MDY (which had been lagging) closed at or near all-time highs. This is in line with our forecasts, and suggests that our forecast for strength into yearend is intact. The market appears to be in the early stages of transitioning from domination by growth stocks into value. Consolidation is likely here but our forecast for a UUP move to the 26 area by yearend looks to be on track.
We continue to see increasing signs that the market has started the end of year rally we have been looking for since late summer. The latest is the performance of the Transportation Index ETFs. IWM and IJR have made new closing and intraday highs. We would be very cautious here on EEM.
We would add money here but also leave a bit out in case such a pullback materializes. One of the reasons we are positive is that equities are broadening out. We continue to be concerned about a rise in rates in the fourth quarter.
SPY made new closing weekly highs, suggesting that our forecast of a strong second half is on track. Trend following systems are positive, indicators are not horribly overbought, and this means the market can advance into yearend, as it is broadening out.
If this rally is to be really strong, then we should see improvement in the broader indexes. Probably the most interesting thing here is the possibility that a significant bottoming pattern in the dollar is under way.
The stock market is reacting erratically to the various storms, but last week saw some improvement to key technical indicators. Overall things continue to improve, and we see no reason to change our forecast for a strong end to 2017.
We have seen some signs that equities are preparing for our forecasted yearend advance. We are very interested in REITs as their accumulation models are stronger than TLT and the charts looks stronger also. This suggests that they would be a good addition to our “income cocktail” in the event that rates rise in the second part of 2017.
