As expected the Fed raised the Federal Funds Rate by .25% and increase the numbers of expected hikes in 2017 to 3. The market sold off slightly on the week closing down .2%. Many of our models are still pretty extreme, so Bulls will not be able to go too far this week. We are still looking at a likely test of the black uptrend line. Since we are entering the most bullish time of the year, Santa, should help the coming pullback to eventually be bought. Look for the Santa rally to be somewhat weaker than past years due to overbought conditions.
Storm clouds are still gathering but bulls are relatively safe in the short term. There has been good amounts of inflows from retail investors over the last few weeks. This is not the good sign as they are always the last to buy. Also, the huge rally in small caps historically lead to medium term tops on the SPX within a month or two. 217 is the first line that bears need to break to be taken seriously. However, rally last few weeks showed Bulls are still strong and we are still likely to see some more up ahead at least into into early January. We also believe we will flirt with 20K on the Dow (fulfilled last week) to bring in even more retail investors.
As we have mentioned, long term yields on bonds have begun to act differently than in recent years. This could be an issue if yields keep on quickly rising. However, we could see a nasty short squeeze in the next few weeks with a quick retrace of some of the gains over the last 2 months.
We are also entering December seasonality. The low volume environment normally should favor the bulls. However, if Santa does not show, 2017 might not be so keen.
Also of note, historically, post election rallies normally last until slightly past inauguration day.
Long-Term Market Outlook (Updated 9/5/16).
Slower week on the news front. Biggest market mover will be the Yellen speech on Monday.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Bullish.
Our short-term models are Bullish but weakening.