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.

Gold Market Sentiment & Structure Confluence

In the last post we suggested that the trend in the Gold market is about to exhaust itself based on structural analysis (link). Since then the gold declined for a day and helped solidify the pattern, along with pessimism, necessary for a sustainable bounce.

Gold Sentiment
Gold sentiment has dipped to levels last seen near last year's lows. Following snap shots are from Daily Sentiment Index values on Nov 21.

Following chart shows longer-term DSI values (originally published by Taylor Dart). We can see that DSI is at lowest levels seen in last year.

Gold miners are also extremely oversold. They are at levels where we have seen major bounces in the past. This bounce can turn into major rally, dependent on internal market strength.

Hulbert index also shows that the sentiment is now negative 18%, which means that the average newsletter writer is now recommending shorting gold. Even though it is not at the lowest level, we have seen higher lows in the sentiment at the bottom. So it's possible that gold prices might bottom with a little elevated sentiment.

Market Classification Model
Along with all the positive developments on the sentiment front, the Market Classification Model remains in a bull market for Gold. As a result, we should not only expect a bounce but a resumption of the uptrend. This resumption could lead to acceleration to the upside. If the market completes the inverted head and shoulders pattern, we could easily see 1800 in 2017.

In the next blog post, we will discuss Fundamental reasons that could support this rise in Gold prices including asset rotation and Indian decision to restrict currency.

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Gold Market - Approaching a Turn

Gold market has been declining for the past few months. This decline came after a very sharp start of the year rally in Gold. Based on gold market's fundamental, technical and sentiment analysis, Gold is approaching a bottom. From a technical perspective, there are three distinct reasons that point us towards an approaching Gold market bottom:

1. Intermediate term Gold structure
2. Longer-term goal structure
3. Market Classification Model

Intermediate term Gold structure

Gold prices topped in early July. The peak in Gold prices coincided with Brexit panic. Since topping in July, prices have gone down in a choppy manner - characteristic of a market correction.

Even though Gold prices spiked on US election night, they went down and have declined since then. If we look at a slightly longer-term pattern, it seems like that the recent decline is part of a big corrective pattern that started in May. 

As a result, this correction will be wave 2 of the rally that started in Dec 2015. Once this wave ends, we will be in for a very sharp rally in wave 3. This rally will most likelt take the prices to near the all time high. Another evidence in this regard is the inverted head and shoulders pattern being carved out by the precious metal:

Inverted Head and Shoulders

Following chart shows weekly Gold prices over last few years. Once can see a nicely formed inverted head and shoulders forming. Once this pattern is completed, it's target is around 1800 level.

Other reasons to support the fact that Gold is approaching a major bottom is the pervasively negative sentiment as evident from Daily sentiment Index, Bullish Percentage Index or Hulbert Gold Newsletter Index.

Market Classification Model

Our proprietary Market Classification Model remains in a bull market. MCM utilizes prop trend identification algorithm to decipher between bull and bear markets. Currently it is in a Bull market. It entered a Bull in April and has maintained its posture since then. We use MCM to make investment decision and add positions.

In the next blog post, we will review sentiment analysis for Gold and fundamental reasoning for a gold rally.

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