US Stocks at Tipping Point

For readers who want to quickly read about the action plan in this environment, scroll down to the Next Steps section. For detailed understanding of current situation, please read through:

Background

Latest rally phase started in November 2016, around election time. Initially, it was regarded as a relief rally for Hillary could become president as FBI investigation had yielded no results. However, it quickly turned into Trump rally because of promises for stimulus and other pro-business policies.

The popular belief was that the new president will only implement pro-business policies like stimulus and tax cuts, while several other more aggressive policies will not be enacted. Fast forward to today, and the pro-business policies remain elusive while the aggressive policies are causing confusion and in return global equity markets are suffering.

Correction that was due

Blaming the market's decline on policies or some external factors is what TV commentators do. But there is another perspective to looking at this decline. And that is related to the fact that the markets have not experienced any substantial decline since last February (2016).

Following charts shows a nicely persistent rally that had endured over the last year in the face of all the uncertainty of 2016. Both SP500 and Nasdaq show a clear 5-wave rally pattern.

It is surreal to look back at the extremely dismal start of 2016, when people were talking about Oil crash and so many other variables. Even then the market managed to end up ~12% in 2016.

In such a volatile year, our proprietary strategy beat the market and the gained 12.2%. Most of the gains were long-term gains, thus minimizing tax impact (Detailed 2016 performance evaluation).

Therefore, one cannot judge the performance of the market just by looking at couple of months. But one thing is for sure, volatility will be high as overdue correction finally arrives.

No Buy signal, means continued decline

There are several other reasons to believe that recent decline is the start of something bigger:

1. No buy signal after 2 day decline
2. Extremely high valuations
3. Political uncertainty without any focus on economic stimulus programs
4. Hawkish Fed 
5. Fairly optimistic sentiment

In order for these stock market rally impediments to go away, market needs to consolidate recent gains. Right now there is no indication that this decline will be the start of a new bear market. However, if the government does not deliver on its pro-business policies, it could quickly turn into one.

Next Steps and Investing Strategies

1. Keep an eye on the Market Classification Model to understand if and when the stock market enters a Bear Market (MCM Details).
2. US markets are still in Bull phase and this could be a good buying opportunity, at lower levels
3. Gold and Bonds can be good alternatives, with careful review of the MCM
4. Develop an investment plan with your goals in mind and invest accordingly. For example, if you want good returns and have some extra cash, one can buy BitCoins

We will continue to explore 2017 strategic investing ideas on this blog. Forward looking investing helps you in keeping a level head while investing. For example, we mentioned that the market had not entered a bear market in Oct-Nov 2016 and added longs, and ended up benefitting from the latest rally. Analysis during election time:

• Post Election Investment World
• Reasons to be Bullish - From Twitter
• Elections and the Stock Market

Therefore, if your interested in free e-mail list or in paid services like Market Classification Model, please fill-out the form below.

November Review and December Forecast

Over the last 2 weeks we have discussed Gold market and the Bond market, in terms of their structure and sentiment, to understand the next rally phase. Detailed analysis can be reviewed here:

• Bond Market Analysis
• Gold Analysis (Part 1 - Structure, Part 2 - Sentiment)

As we enter a new month, its critical to quickly review last month and then try to understand where things could go in the last month of 2016.

November 2016

Elections 

At the beginning of November, market experienced a sustained consecutive negative days. This negative behavior, not only tilted the sentiment to bearish and technical indicators to oversold, it also completed the correction pattern. This completion gave way to an amazing rally. We discussed the upcoming rally several times in following posts:

• Reasons to be Bullish - From Twitter

• Elections and the Stock Market

even though few people will remember this fact but the market started rallying even before the election on the news that FBI had dropped the investigation involving Hillary Clinton's e-mail. At that point, people attributed the rally to Mrs. Clinton's impending victory. However, as Mr. Trump won and the market continued its rally, it took many by surprise. 

This tells us that news/economic/political events don't matter. It's the reaction to these events that matter. And one of the best ways to gauge the reaction objectively is by looking at the price structure and sentiment indicators, along with forecasting strategies. 

Correlation with the US Dollar

Even more interesting is the fact that this rally has come in sync with rallying US Dollar. Typically, when US Dollar rallies, all asset classes are impacted. And if not directly impacted, they find it difficult to rally. But following chart shows the amazing correlation between US Dollar and the stock market:

Divergence with Advance Decline line

While this rally has made a lot of market commentators excited about the prospects of a major rally and 2017 with prospects of a major stimulus, this rally wasn't substantial enough to eliminate NYAD divergence.

Divergence in Advance Decline issues is critical for a sustained rally. This doesn't mean that this current rally cannot move much higher, it just means that the near-term rally could face challenges to continue in face of this divergence.

What's Next in December?

In summary, we have credible reasons to believe that the recent stock market rally is extended and we could see a market correction over the next 1-2 weeks (probably till next IPM turn window). While Stocks market corrects, asset reallocation can take place with money flowing into oversold sectors like Gold and Bonds.

Since US Dollar is also extended, a correction in the Dollar index will also support Gold rally. On the other hand, Fed FOMC meeting and an announcement to increase the short-term rates can also reduce some of the uncertainty from the Bond market, which could result in reprieve rally for Bonds.

Market might resume its uptrend in the 2nd half of December. However, the velocity of the ascent might not be as significant, as it has been in November.

Lastly, for Gold it is a do-or-die point. It needs to rally above 1205 in the next few weeks or it will likely enter another bear market.

If interested in free e-mail list or in paid services, please fill-out the form below.

Post Election Investment World

We have been discussing stock market uptrend and upcoming bottom for the past few weeks (post 1, post 2, post 3). And as of today, DJIA futures are above all time highs (shown below).

Such a market action in the face of presidential uncertainty is amazing. Although it bodes very well for the overall economy, we will talk about potential Trump impact in the upcoming post.

From an investment perspective there are different scenarios that one needs to be aware of.

Stock Market:
As stocks break out into uncharted territory and Nasdaq approaches the vacuum zone, it means that we are on the cusp of a major rally.

Like many rallies before it, this rally will also be debated by market participants as to why would market rally while president's economic plan would mean job losses. However, the pattern suggests that the stock market remains in a bull trend.

In essence, the underlying economy is very strong and would result in strong growth without any external influence. We will discuss internal structure of the market in future posts.

Bond Market:
Bond market's sharp sell-off probably suggests that the long-term bond bull market has ended. We are probably on the cusp of a significant inflation cycle. Near zero bonds are a thing of the past. Even though we might see some respite from the Federal Reserves, which might hold-off on the decision to increase the interest rates, we are surely in for higher rates.

Following chart shows a very long-term bond yields. Post-election rally has broken a long-term down trend line - another confirmation of the trend change. We have been keeping track of this wave count for years now and have discussed potential bond yield bottom with clients.

Many of our clients bought houses, properties etc in the last 2 years!

This market behavior has significant consequences for investors and we will discuss these consequences in detail. However, one should keep in mind that this kind of behavior will not result in bonds going to stratosphere in the near future. In fact, after couple more months of rising yields, yields might see a very sharp correction.

Metals
Copper has rallied very sharply over the past few days. Precious metals rallied on the news of potential Trump win - fear trade, but since then have declined. This decline was a significant intra-day reversal. But the overall trend in metals remains up.

Gold could continue to rally in anticipation of a higher inflationary environment. So will the gold stocks. Gold and Silver are tracing out very interesting patterns and could have significant upside potential if the can break above 1320 in Gold. We will also discuss the gold pattern in the near future. Past analysis on gold accurately predicted the bottom in October.

Portfolio Allocation:
Our proprietary model has performed extremely well in 2016. It not only kept us in the market during relevant bull phases, it also enabled us to maintain our calm whether during Brexit shock or Trump shocker. Any portfolio that can:

1. Yield returns which are uncorrelated to the market
2. Save a lot of heart-burn when the market goes against you by 1000s of points whether in futures or cash
3. Provide you consistent returns AND
4. Mitigate volatility and provides very high Sharp ratio

by the grace of Almighty, is an amazing performance. We will write a white paper on the performance of the model portfolio in 2016 - a year of surprises and nerve wrecking market action!

If interested in free e-mail list or in paid services, please fill-out the form below.

Reasons to be Bullish - From Twitter

Market completed longer term corrective pattern - Higher prices ahead? https://t.co/lyQxShgxmX $SPY $DJIA $QQQ pic.twitter.com/SeQjjd6D9P

— U_S_Thrive (@survive_thrive) November 8, 2016

A rerun chart from last week. VIX now now longer above all its futures contracts. Looks therefore like it was a scary dip, not a downtrend. pic.twitter.com/xyklR0F14r

— Tom McClellan (@McClellanOsc) November 7, 2016

$VIX term structure suggests that we are approaching an inflection point but note that it has spiked much higher in a few cases#volatility pic.twitter.com/s36s0ZnGun

— Babak (@TN) November 3, 2016

Options Traders Ramp Up Put Buying As Fear Spikes - https://t.co/bq51yqoc8t blog by @JLyonsFundMgmt $SPY pic.twitter.com/UGvsSzqECd

— See It Market (@seeitmarket) November 7, 2016

Chart Of The Week (by views): Investors (Over?-)Prepared For Election Volatility (11/1) $VXST
Post: https://t.co/p7piJzdNeI pic.twitter.com/lOpF6pMibP

— Dana Lyons (@JLyonsFundMgmt) November 5, 2016

we have yet to see any panic from the CBOE equity put/call ratio (normalized by dividing 10d/150d MA) $OEX P/C ratio still negative for mkt pic.twitter.com/z2wvkaDdmv

— Babak (@TN) November 4, 2016

Elections and the Stock Market

Market rallied very powerfully today and after a long time it sustained the morning gains. Not only did it sustain the morning gains, market was able to build on it.

We have maintained that the stock market remains in an uptrend and no matter how the election results come out, market would continue its uptrend till the time it enters a bear market. Right now there are no indications that the trend has reversed.

In fact, right now, market seems to have completed its ~4 month long sideways action and is on the verge of breaking out of current 2 year old range.

We discussed the market structure in this post few days ago. Following charts shows what was highlighted and what we saw today:

Long-term consolidation along with this pattern and sentiment decline suggests that there is a very good chance we could see a sharp rally from here. This rally could last for few months. Following chart shows the longer-term range bound market:

Portfolio Alignment

Our strategies are aligned with this potential market moving scenario is ready to take advantage of market move. At the same time, it is possible that we might see a surprise in the election and could witness some near-term turbulence in the markets. Keeping this scenario in mind, we are positioned to mitigate any volatility impact. 

Our portfolios take advantage of market moving events by positioning ahead of them and hedging against potential risks. So far in 2016, we are up ~20% YTD with a Beta of 0.36 i.e. these returns are totally uncorrelated with stock market performance.

As for other areas for investment, we will discuss metal and bonds in the next few posts. Bonds might see further sell-off after the election and before Federal Reserves rate announcement in December. 

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Market Approaches Key Levels

Market's decline is now almost 3 months old and sideways action is ~4 months long. In the beginning this action was purely sideways but recently, it has taken a sharper turn to the downside. With this decline comes an opportunity that the sentiment is getting worse by the day, while proprietary indicator remains in a bull state.

This worsening sentiment is essentially fuel for the market. Sentiment is one fuel which really kindles market rallies. Right now sentiment is at level normally seen at significant market bottoms, and the market structure is now supporting a potentially sharp rally.

Market Structure
Recent investigation of the market structure suggests that the SP500 along with other indices is tracing out a potentially corrective structure of 3 wave decline.

Following chart shows this structure. Wave C (3rd leg) seems like an ending diagonal. Ending diagonals take place towards the end of a market move and give way to a sharp rally. So once the market rallying, it could take-out many of the recent highs.

Similar pattern is visible in almost all major indices. Following chart highlights this structure in Dow Jones Industrial Average

Along side this market structure, stock market indices have also traced more than 50% of their rally since Brexit vote. This shows that recent correct is now very substantial and should be treated as a minor wave 2. If this is wave 2, it will give wave to a very sharp wave-3 rally.

Sentiment

Following charts show sentiment as measured through Fear/Greed indicators and AAII. Both of these measures suggest that the sentiment is in areas where we see significant bottoms.

However, the key is to be detached with the market. Know when there is potential for market moving events but stock to your plan. So far in 2016, our strategic investment portfolio has beaten the stock market by ~12%.

 If interested in free e-mail list or in paid services, please fill-out the form below.