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.
Since we wrote about our yearend outlook in the weekly we have sort of a fun idea suggested by some clients, of some ETFs that could do well in 2017. So, we have picked six ETFs that we would consider including in portfolios.
Overall, the price structure on the major indexes still looks positive. TRADERS might very well want to buy TLT (Barclays 20 Year Treasury Bond iShare) or TLO (Barclays Long Term Treasury Bond iShare) here for a bounce. The reason for this is that the stop losses are SO close that risk is low. This is a two-week trade that should be closed out on December 30th.
Our thesis has been, and continues to be, that dividend paying stocks and bonds are not correlated over the long run. Income investing is likely to become a “cocktail” of various instruments in a rising rate environment, and Converts and Tips could be decent components of the mixture. Normally, gold would be rallying on inflation fears, but in this case it is not. Our best guess is that the market is suggesting that inflation will be under control for at least the first part of the Trump economy.
We continue to look for some sideways and choppy behavior to reload the daily stochastics on ETFs such as SPY, DIA, and QQQ. We reiterate that we expect the European Union to come under pressure, but for us this is bullish, and not bearish, as others seem to think.
While the market should continue strong at the very end of the year, we would expect this week to be choppy to down as the daily stochastic recycles. This should be more of a time correction and less of a price decline. We are not selling this move, as surprises could occur on the upside. The technical message is clear – the risk is for higher rates, most likely after at least some kind of monthly bounce, then rates should resume their climb.
We maintain our objective of 223 on SPY but would not be surprised to see 218 before this is struck. The IXG suggests that the results of the Italian referendum should be good, not bad, for international banks.
We are close to our target of 223 on SPY by yearend – but we may not hit it without an intervening pullback. Technical Indicators on TLT and other fixed income instruments suggest that the recent bond decline may be overdone and due for a bounce.
