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.
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.
