Last week was definitely not a normal, low volume, melt higher, holiday week. The SPX closed down 1.10%. We nailed the head fake and breakdown of the triangle pattern. This week is a bit trickier we are expecting a lower low but we could see a bounce first. So basically, if we see a lower low on Tuesday a bounce should soon follow. If we see a bounce, chances are we will at least revisit the 223 low. After this, we may enter a range phase leading into Trump’s inauguration.
As we have noted, look for the Santa rally to be somewhat weaker than past years. So far, this has played out as we expected. Santa has 2 more days to turn this period green. If not, this is a warning sign for 2017.
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 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 rising. As we expected a short squeeze started last week fueled by mandatory fund re-balances. Look for this to be a 2 legged move.
If we do not see a nice rally in the next two days Santa will have failed to show. Santa’s failure to show has historically proceeded bear markets. This would be strike 1 of 3. Next, we will look to the early warning system (first 5 trading days of the year), and the January barometer for clues.
Long-Term Market Outlook (Updated 1/1/17).
This week the highlights are the FOMC minutes on Wednesday and the December Non-farm report on Friday.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Turning Bearish.
Our short-term models are Bearish.