Stock Market Update: Positioning For Potential Year-End Rally

Mark Newton

The market got a bit overextended and needed a breather. Although the broader construct of the S&P 500 (INDEXSP:.INX) is bullish, I am bearish over the very near-term (until highs are exceeded on a closing basis).

I expect lower prices in the very short run (2-3 days), perhaps down to 2232. Futures will need to rally back over 2271 for traders to expect that this pullback is over and prepare a stock market year-end rally back up to 2300. In short, a move back over 2271 and it’s right to stick with the uptrend.

Yesterday’s price action was not very convincing…

Thursday was unconvincing that any type of weakness in the broad equity indices had run its course. Momentum is waning, yet most indices are in the process of completing Exhaustion signals on Daily charts, per Demark indicators. Prices made back around 60% of the prior day’s losses, yet still didn’t move back to new highs while being largely range-bound over the last couple days. Market breadth was lackluster, with barely more stocks advancing than declining, while Financials accounted for most of the gains, with barely most of the sectors “hugging the flat line.” Certainly not broad-based by any stretch. While it pays to be wary of fighting the tape too much in the month of December, it pays to watch carefully which sectors are moving and which ones aren’t as the market heads into December Quad-expiration today. We saw further evidence of the US Dollar index accelerating substantially higher, as the Euro made a monumental breakdown vs USD, (which didn’t go unnoticed) while Precious metals were hard hit, as both Gold and Silver fell 3 and 6% respectively.

Sector-wise, Financials were the only sector to record gains over 1% on the day. And even in this rally we’ve seen a bit of slowing in the short run. This could lead to pullbacks in the weeks ahead once Treasury yields initial rise has run its course. While the last two days cast doubt that we’ve arrived at that juncture just yet, sentiment and waning momentum amidst a very steep uptrend give pause to trying to initiate new longs in the Financial sector at present – extreme selectivity is needed.

Meanwhile, fixed income and FX continue to provide the majority of the excitement these days and tell most of the narrative of what’s been happening in the market in December. The Yield curve has steepened on the front end, yet flattened dramatically when looking at 5s/30s and 10s/30s curves, while the Dollar has accelerated in a near parabolic fashion.

S&P 500 Chart Analysis

The broad stock market index has begun to wane in recent days. This hasn’t taken the form of any meaningful pullback just yet, but rather some sideways consolidation which has caused momentum to drop off a bit after getting overbought. Counter-trend sell signals are present on daily charts, but not confirmed (Demark). On the weekly charts, it’s still premature and require another few weeks of upside before any meaningful signs of exhaustion. Near-term, weakness still looks possible for a few days, but any pullback should be used to buy with 2200 likely being a floor before strength returns into year-end.

s&p 500 futures march contract trading chart december 16
chart source: Bloomberg

US Dollar Index Chart

Monthly charts of the US Dollar index show the extent of the recent gains as they’ve risen to the highest levels since 2003. While near-term overbought conditions exist, the broader chart looks quite constructive and should allow for further gains into 2017. This should result in the Euro dropping down to Parity and below vs the US Dollar. For now, any weakness should prove to be a buying opportunity.

us-dollar-index-dxy-chart-breakout-bull-rally-december-2016
chart source: Bloomberg

 

Note that you can catch more trading ideas and insights from me over at my site, Newton Advisor.  Thanks for reading.

 

Twitter:  @MarkNewtonCMT

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

 

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