Last week Santa finally showed up. We did see the bounce as we had expected and retested the all time high. Overall, the Santa rally was good for a .53% gain. Also of note, the market passed the early warning system test, ending the week up 1.65%. So far 2017 is starting off on the right foot. We still think we are going to enter a range phase and that the current attempt to breakout will fail in the short term.
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 again) 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.
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 fueled by mandatory fund re-balances. Look for this to be a 2 legged move.
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).
Slow week on the calendar. The highlight is a bunch of fed speakers. We also posted the normal market movement leading up to the inauguration.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Turning Bearish.
Our short-term models are Bullish.