Pullback Due but Santa to Come First?

Short-term

Last week we did see some weakness mid week, but once again it was quickly bought and we saw yet another new all time high. This time of year it is hard to get a larger pullback because of seasonality. However, we are still extremely over extended. So we expect to see one over the next few weeks. This pullback will take us down to the 262 area. That pullback will likely once again be bought.

Statistics for 4 up week on the S&P: 67% chance of closing green but with a good profit factor.

Medium-Term:

We are now in the final climax phase of the long 8 year bull market. This will be the exhaustion phase of the Bull move. While this phase could continue for some time, chances are the upside is limited to around the 260-270 level in the medium term, but with a such a climax rationally goes out the window. Also, of note is that there is a long standing trend line dating back to the 2009 low above at this same 260-270 level. Since we have broken this trend line, it further increases the change a large, abrupt pullback. While the chances of such a sudden “crash” remain low by definition, they are slowly increasing.

SPY has now risen for 13 months is a row which breaks the previous record, which is another sign of the current climatic market phase. We are now seeing volume indicators spike higher while at the same time momentum is slowly weakening. This type of divergence should lead to a sharp 1-3 month pullback which can start at any time over the next few months. The 258 level would be the first line in the sand. However, Bulls will likely buy the first larger pullback so Bulls continue to be in full control for the foreseeable future.

Even more evidence of the current climax can be seen with SPY being above its moving average (the blue line) for 56 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 on the SPX since 1995 (about 62 periods), so we are very rare territory.

We are also entering December seasonality. The low volume environment normally should favor the bulls. However, if Santa does not show, 2018 might not be so keen.

Long-Term:

Long-Term Market Outlook (Updated 11/5/17).

The Calendar:

This week: We will see the GDP report and durable goods. Also we will have the Tax vote on Tuesday.

Next week: is slow new wise, but look for some pre tax selling into year end.

Trend Following Models:

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

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