Market Overview
Markets have rallied very significantly. First burst of the
rally was after election till mid-December and the second burst has been from
end of January till today. Impressively, our proprietary Market Classification Model remained long stocks during this entire period. Model
turned bullish soon after Brexit and has remained bullish since July’16.
Although in the hindsight one can easily say that the market
rallied and it was prudent to remain long throughout this time, most of the
market participants did not stay long. In fact, there have been significant
bursts of pessimism during this rally. For example:
- Brexit induced anxiety
- Election related stress
- Post-election disbelief
- Post Executive orders convolution
However, these kind of market panics are the very reason why
this market has been able to rally this far – Market likes to climb a wall of
worry.
Now that stocks have rallied sharply over the last two weeks,
we are approaching a period of consolidation. Consolidation doesn’t mean a
sharp decline rather a period of sideways action like we saw in January, to
digest recent gains. A potential scenario is market topping towards the end of
February, according to Inflection Point Model and then consolidating till next
earnings reports to justify high prices.
Once this consolidation phase arrives, other assets like
Gold are likely to outperform.
Gold
Gold has been consolidating for some time. And this
consolidation is supported by a series of higher highs and higher lows, which
means that the next stage rally could be very significant. Gold also remains in
a Bull market and would be an ideal candidate for a continued rally.
Following chart shows Gold performance over the past 2
months, where a steady uptrend is clearly visible.
Gold stocks are also tracing out higher highs and higher
lows. In fact, following chart shows a potential head and shoulders pattern
being crafted out by the Gold stocks. Once this pattern is completed, Gold
miners can easily make a run for the summer 2016 highs.
Latest MCM report included details about Gold’s uptrend and
where the trend is with respect to the overall bull market.
Upside potential is further amplified by the fact that Gold
performs very well in an inflationary environment and with rising interest
rates, we are likely entering an inflationary environment.
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