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.
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.
