Last week we went nowhere. As we noted we have now officially entered a range phase. Over the last year, this phase has lead to a decent pullback in the next few weeks. While historically, chances are about 50/50 for a break up or a break down, we think we will once again see a break down. This would coincide well with the presidential calendar below as Trump assumes the Presidency.
To make this a better trade, we are looking for one more push up this week as a false breakout. This move could also give the Dow the chance to break 20k.
For Bears, a break of 225 should trigger a nice wave of selling.
Storm clouds are still gathering. There has been good amounts of inflows from retail investors over the last few weeks. This is not a 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. We are also now seeing longer term momentum weakening with funds fully invested, which is another red flag. 220 is the first line that The Bears need to break to be taken seriously. We also believe we will flirt with 20K on the Dow (fulfilled) to bring in even more retail investors.
Volatility has become very low over the last few weeks. This is signaling things are too complacent. Couple this with very high bullish positions, and we are looking for something to rattle the market in the near future. We noted last week, Fund managers became less bullish from an extreme. If this countess the next week or two, a pullback should be right around the corner.
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 rising. As we expected a short squeeze started two week ago fueled by mandatory fund re-balances. Leg one of the squeeze has completed. Look for a second leg coinciding with a market pullback.
As of now we are 2 for 3 in favor of the bulls, as far as early barometers. Next, we will look to the performance of the entire month of January.
Long-Term Market Outlook (Updated 1/1/17).
The Yellen Speech on Wednesday will be the highlight. We also posted the normal market movement leading up to the inauguration. Historically, a drop is seen about 10 days after the election, when the market realizes that he is not doing things fast enough.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Turning Bearish.
Our short-term models are Bullish.