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.
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.
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.
