The Technical Picture
The technical picture has been deteriorating quickly in the last month, but the cycles have held the market up. When the cycles peak out, the technical weakness can have its effect. Here are some cautionary sentiment developments:
- The amount of money in inverse index funds has fallen by 75%, one of the lowest levels in 20 years.
- Strategists on Wall Street are issuing 2017 projections. The average strategist expects the S&P to end 2017 at 2356, a gain of about 4%. That would be their least-bullish outlook since 2003. Strategists rarely deviate from what the market did the prior year, and their forecasts have often missed the mark. The difference between what the S&P returned in a given year versus what strategists had forecast has ranged from -49% to +22%. The average difference between the highest and lowest forecast is the lowest on record. This difference was very low in 2007 when strategists expected the S&P to rally about 9% in 2008, but it fell 38%. My conclusion is that this climate reinforces my projection for a ‘7’ year correction and much volatility, with a higher close by yearend.
- Money managers are of the same opinion. The latest survey of active money managers from NAAIM shows bullish sentiment with low standard deviation, among the most concentrated readings in its short history. As I have pointed out in the past, this number can reverse very quickly.
The S&P broke out to the upside with 3 possible upside targets: 2300, 2380, and 2550. Thus far, the high was in mid-month at 2272, just 28 points short of the lowest target. Below, we see that:
- The S&P daily momentum did not exceed its prior high.
- The weekly S&P is now overbought.
- Most seriously, the monthly S&P is now showing a bearish divergence with momentum.
This is an excerpt from the monthly Cycles Research Early Warning Service, a monthly e-mail report that analyzes the trends in the US stock market, the bond market, and the gold market. There are stock and ETF recommendations and high-probability S&P turning points.
Cycles Research Early Warning Service has been ranked the top stock market timing service for 2016 by Timer Digest, an independent rating service in Ct., USA.
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