Another Leg Down Likely

Short-Term:

Last week, we saw the effect of the thin air we have been talking about. The market dropped almost 2% from the high on Tuesday. This week we expect a bounce soon but chances are that bounce will lead to another leg down. This should fill the 242 gap. Also the 238 area will will be heavily defended by Bulls.

Statistics for 1 down week on the S&P: next week historically, has a 59% chance to close in the green, with a decent profit factor.

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 (which we saw last week). 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. One other issue we need to keep an eye on is the tension in the Koren Peninsula. Any sort of mistake there could lead to an extreme result.

Also of note, SPY has now been above its moving average (the blue line) for 38 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: the Fed Minutes will cap off the calendar.

 

Next week: we will see a bunch of new data points.

Trend Following Models:

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

 

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