Over the last week, probabilities have risen for a short-term correction in the U.S. equity markets. While it should not be severe (if indeed we get it at all!), now might be a time to look at some of the dividend stock ETFs that are popular.
One of “Fred’s Rules” is that any stock that doubles the performance of the S&P 500 is vulnerable to a 50% retracement of that advance even if it is ultimately going to make higher highs.
Our forecast remains for a strong second half, but many indicators are suggesting a weaker than expected end to June. Oil has been a bit weaker than we expected but is still in a bottoming area. Stochastics are oversold, and if they can turn up we should see a sharp rally in this commodity. DBC is trading right near support, oversold and on a trading buy signal.
If GLD gaps up and hits our 124 target, then TRADERS should sell, as it will probably settle back. Investors should hold for a bit. We continue to think that commodities in general should start to do better in the second half of 2017.
Two strong sectors we have been recommending are XLI and XLB. These are both making new highs with little coverage from the financial media. TYX (CBOE 30-Year bond Index) suggests bonds remain in a bull market until it starts closing above 32.50. Key areas for GLD to hold are 119, and SLV should hold 16.
SPY has moved above 241, roughly on the schedule we suggested, and the equity markets are set to have a stronger end to 2017. Part of our forecast for the second part of 2017 is that rates will rise more than many expect in the second part of the year.
Stocks are, once again, challenging the 240 area on SPY and heading for the 241 area, our breakout number. SLX has pulled back to test support in the 36 area and has started to rally.
This week is important and may give us either the breakout above SPY 241 or breakdown below SPY 230 to suggest the market is leaving this range. Last week’s trading in oil was positive, and it looks as if a bottom has been put in. We have preferred larger money center banks for a while, but the charts suggest caution throughout the sector.
We are still bullish and are not surprised that SPY is hugging 240 during options expiration week. While there are some things wrong with the market (there always are!), our parameters are still the same – above 241 on SPY sets up a strong yearend, and a correction from here that moves below 230 either now, or after a breakout above 241, would make us less bullish. Oil has closed above $48/Bbl giving us a buy signal in the key seasonal timeframe. This should test $52 to $54, and if through here our forecast price for the year remains $67.
We have suggested that the bottom of the correction has already occurred but the confirmation we have been looking for - a close on SPY above 241 – has yet to occur. Additional confirmation would be if oil can close above $48/Bbl, as this should kick energy into gear. This week is options expiration.
European markets still look attractive technically and Developed Markets still look strong. SPY has not made new closing highs, although other indexes have traded up. Until this occurs, the low we have been looking for in May is NOT confirmed.
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.
