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.
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.
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.
