Financial Outlook Ahead
Stocks finished the week with a big gain as investors remained optimistic about the U.S. economy. The S&P 500 climbed 1.7 percent. That was a marked change from last year, when the index lost 6 percent as the market got off to its worst opening week in history.
The Labor Department said U.S. employers added 156,000 jobs in December, which was solid but slightly disappointing. However the government said hourly pay jumped 2.9 percent from December 2015, the biggest monthly increase in seven years. Overall, job growth remained steady in 2016 but slowed a bit from 2015.
Factory orders dropped 2.4 percent [slightly higher than 2.3% expectation] after a 2.8 percent rise in October, the Commerce Department reported Friday.
It was the first decline since June but the weakness was led by a 73.8 percent plunge in demand for commercial aircraft following a 94.5 percent surge in October.
The Commerce Department reported that orders for durable goods fell 4.6% in November, led by a plunge in order from Boeing Co. Economists had expected overall durable-goods orders to drop 4.5%..
The U.S. trade deficit in November rose to the highest level in nine months as imports of oil and other foreign goods increased, while American exports fell for a second month.
The trade deficit jumped 6.8 percent to $45.2 billion, the largest imbalance since February, the Commerce Department reported Friday.
Technically – 90% of stocks in the Dow are trading above the 50 day moving average, which tells us that medium term momentum level is overbought and the odds of seeing further upside, prior to corrective action is highly unlikely.
Investors tend to become increasingly bullish as stocks move higher, but in reality, we have to remember that stocks are primarily counter trend assets and the great majority of gains turn into false breakouts.
Technically, SPY is setting up a reversal 1-2-3 pattern, which usually causes a breakdown below the neck line, which is the number 2 point on the chart. I’m expecting to see the market break further and violate the 50 day line to the downside.
This would cause momentum levels to dip down below 50th percentile, which is the usual reaction to overbought market conditions, as you can see from the chart above that goes back 10 years.
I know it’s difficult for some traders to focus on corrective pressure when stocks are moving up so strongly, but statistically and fundamentally, the current market climate is not sustainable in the long run and the most probable scenario will turn out to be increased volatility, lower stock prices and more upside from bonds…till we see corrective action create balance across the various sectors, which will cause market to be balanced and ready for upside once again.
The probability that the Federal Open Market Committee will increase its fed funds rate at its May 3 meeting is 37%, which compares to 33% yesterday and the probability of a rate hike at the June 14 meeting is 66%, when 64% was predicted yesterday.
Technically, bonds are pulling back after strong short term momentum. Notice that bonds began gaining strength as soon as blue chip stocks slowed down their momentum level to the upside.
In the next few weeks, I’m expecting NYSE and Dow to give back substantial gains, since economic data is once again taking economy to uncertainty and that’s not positive for stocks and causes investors to rotate into the bond market. Expect more upside from bonds in the coming days.
Global Currency Market
The U.S. dollar is higher after the probabilities of tighter credit from the Fed increased a bit from yesterday.
The main trend for the greenback is higher and is likely to continue to be supported by a hawkish Federal Reserve.
The euro currency is lower after a report showed German factory orders declined in November, falling 2.5% from October. The median estimate called for a drop of 2.4%.
The euro currency is lower in spite of news that economic confidence in the euro zone advanced to the highest level since 2011 at the end of 2016.
Wishing you the best,