Trading and Investing Tips and Watchlist for 2017
Key Macro Takeaway - An Ending Diagonal could be under construction
The great thing about the first week of January is that it resets the meter to 0-0-0. Whether you were down 25% last year or up, it’s irrelevant. The game begins again. And this is a time to get into the position of a cornerback and think like him. Great cornerbacks have no memory. They get hit, they get up and move on. And this is our first biggest recommendation to all our clients for 2017. Develop the memory of a cornerback. Whether you’ve had a winning trade or a losing one. Get over it quickly. Being bullish or bearish is irrelevant. Focus on being right. Well, at least that is what we all say to each other at our shop. We survived 2016 because of that. But given how one-sided things have become as we enter 2017, this year could be brutal.
Let’s pick up from where we left off pre-Xmas. The charts below show two fascinating set-ups. On the left is the SPX and you will recall this A-B-C-D-E pattern that we showed you. Notice the new perfect hit on the support trend line which arrested the small pullback into the 30th of Dec (shown in the shaded circle). Was it a mere co-incidence that the market took notice of this trend line and bounced right back off it? Or did the market dig into its own memory bank, respected the trend line and did what it was supposed to i.e. take support? Whatever you believe, this line just became a whole lot more important for the overall trend. Next, take a look at the distance of price from the 200 DMA (the blue line). The market is more stretched today than at any point in the past 3.5 years. If ever there was a time to reflect upon the principles of Mean Reversion, surely now must be a ripe time to think on those lines.
It looks like the easy Trump money has already been made. Whether you made the money or not through this rally is now merely a fact of history but getting bullish on the market at this level is now a low probability trade. Still, surprising things have happened and the Index could be getting ready to break out of this shaded pattern over the next few days. Whilst that may be what turns up next, we’ve spotted a minor divergence (shown on the chart along side) between the US 10 year and the Banks Index which tells us to open up a bit of caution. Notice how the blue and the red lines have been in perfect harmony for the past 12 months. Bond yields have driven bank stocks and vice versa. But bond yields peaked last month and have tailed off while banks have continued to bid higher. We see the same thing in Europe too between Bunds and banks. This SPX rally has been led by the Financials. We’re watching for a turning point there.
Things to watch:
- Areas of strength remain the Financials, Transports, Industrials, Materials and Energy. We cannot find any strong evidence yet of things failing here. So stick with the trends inherited from 2016 for now.
- We’re not nitpicking here, but is it just us or do you also think that the NASDAQ is flashing some bothering signs? Apple topped against the SPX in 2012 (yes, that is not a typo) and the biggies— Amazon, Facebook and Google are not able to press to new highs. Something is amiss.
- US retail has still not come to the party with Macy’s, Kohl’s, Ralph Lauren, Coach—to name a few, still struggling to catch a bid. Not everything needs to rally though, but it is certainly a concern. It was good to see GM & Ford catch a bid though which makes the Autos an interesting area to be long from here.
- Finally, pay most attention to the Regional Banks. KRE is now so stretched we are itching to short it!
Source Data: Bloomberg, Company Accounts, Third Party Industry Research. Author: Ashwani Mathur
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