FED Week

Short-Term:

As we noted, Bulls have indeed bought themselves more time.  We hit 80% of the green target last week but we will likely still try to grind higher. Chances are we see a bit of a pullback on Monday but that will normally be bought. We are currently in a tight bullish channel. While we can still grind higher for some time there is a 60% chance that all these gain will eventually be given back. That makes the 243 gap a prime Bearish target.

Statistics for 3 up weeks on the S&P: 53% chance to close green the following week with a profit factor above 1.

Medium-Term:

We saw a large move down on May 17th which was quickly bought. This low formed yet another supposedly “rare” V bottom. The market has been sucking in short with these quick drop only to quickly squeeze them, forcing the market even higher. We have come to believe this invisible hand under the market is stemming from ETFs with their constant inflows of passive money.

We are currently in an exhaustion phase of a Bull move. While this phase could continue for some time, chances are the upside is limited to around the 250-255 level in the medium term. Since this is the second flag formation in the last 4 months, chances are this will be a final flag that leads to a 10-15 point pullback.  This run also increases the chance of an abrupt pullback with little or no warning. This is because we are entering thin air, with the market very over extend. Also, the lack of a broad rally and weaker momentum further increases the potential.

A catalyst for an abrupt pullback may very well be the upcoming debt ceiling debate. The 6 month, 3 month Treasury spread recently turned negative so the market may be starting to pay attention. We also think the recent weakness in the dollar is foretelling a epic debt battle.

 

Also of note, SPY has now been above its moving average (the blue line) for 35 periods. This is extremely unusual and we normally leads to a fall below this average in the near future. This is now the longest period above the average since 2003 (about 50 periods), so we are very rare territory.

 

Finally,  August and September are the most Bearish months of the year so seasonality is no longer on the side of the Bulls.

Long-Term:

Long-Term Market Outlook (Updated 4/16/17).

The Calendar:

This week: In all likelihood the FED meeting will be a non event as the market thinks there is a 97% chance that rates stay unchanged.

Next week will be highlighted by the Jobs report.

Trend Following Models:

Our long-term models are Bullish.
Our medium-term models are Bullish but weakening.
Our short-term models are Bullish.

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