Last week we saw The Bulls take advantage of the lower volume into the holiday weekend with a stong breakout from the Bear Flag. Yet each bar was weaker than the last, signaling some exhaustion. Thus we are looking for a Pullback early this week, which should normally be bought. The market will then likely try to break the August all time high.
Statistics for 2 up weeks on the S&P: 57% chance to close green the following week with a profit factor below 1. Not good for Bulls.
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. We have seen yet another Bear Flag Breakout. The pullbacks, however, in the flags keep getting more aggressive. So Bears are slowly getting stronger.
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 42 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 Market Outlook (Updated 4/16/17).
This week is fairly slow on economic news front.
Next week is still rather slow.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Bullish.
Our short-term models are Bullish.