Rates?

Short-Term:

Last week we stated to see gravity come into play as we expected. While we could see a small bounce early in the week leading into the Fed meeting, chances are we will see another leg down shortly after. We are still way to high above some moving averages so it will still take some time for the so called parachute to deploy that we mentioned in last week’s post. Then, we will likely see bulls by the dip aggressively. This week we are expecting a break below last weeks low and chances are we will test the trend line around 232-233 in the next 2 weeks.

 

Medium-Term:

Bulls have now bought themselves more time. There likely will be a pullback in the short term to alleviate the overbought conditions. That pullback will almost certainly be bought and the market will attempt to at least retest the highs. This will be the next chance to see a stronger Bear emerge. This time frame should also coincide with the anticipation of the upcoming French elections this April. In our opinion, a Le Pen win would be much worse than Brexit for the Market. We think it would signal the final Knell for the Eurozone. Also Brexit is expected to take place sometime in Q2 so that will add volatility when the event actually takes place.

228 is the first line that The Bears need to break to be taken seriously.  As stated above; there is a much better chance atm that bulls will buy this first dip over the next month before a more sustained pullback that we believe will eventually test the 224 level.

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 Bears could make a large stop run with little warning.

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 a few weeks ago fueled by mandatory fund re-balances. Leg one of the squeeze has completed. Look for a second leg coinciding with the coming market pullback. We also now think the end of this Bull market will coincide with the 10year yield around 3.5%.

We are keeping an eye on Crude. Smart money is currently extremely short. The last time this happened was when oil crashed in 2014.So we could see up to a 40% retrace of the gains made since the February 2016 low. This would ultimately put extra pressure on the overall market.

Long-Term:

Long-Term Market Outlook (Updated 1/1/17).

The 2400 target was fulfilled. This was a great area to take some profits off the table, and we should normally see a pullback here.

The Calendar:

This week is all about the Fed. Chances are around 88% that they will raise rates.

We also need to keep an eye on the Dutch elections on March 15. A Wilders win wound completely take the market by surprise.

Next week will be capped off with Yellen speaking.

Trend Following Models:

Our long-term models are Bullish.
Our medium-term models are Bullish but turning Bearish.
Our short-term models are Bearish.

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