Financial Outlook Week Ahead
Hello [MM_Member_Data name=’firstName’],
Stocks were mixed the last day of the year. SPY is violating the 20 day moving average and volatility is beginning to rise. I’m expecting more downside pressure, which will erase the gains we’ve seen from blue chips since the election in the next month.
Slowing in orders pulled back December’s Chicago PMI to a lower-than-expected 54.6, down 3 full points from 57.6 in November.
New orders continued to expand (remained over 50) but at a slower pace, down a sharp 6.7 points to 56.5. Backlog orders moved back into contraction, production slowed, while employment held steady.
Input costs rose in the month, driving prices paid 1.2 points higher to a 58.0 level which is consistent with moderate inflationary pressure.
The probability that the Federal Open Market Committee will increase its fed funds rate at its May 2017 meeting is 31%, which compares to 33% yesterday and the probability of a rate hike at the June meeting is 69%, when 67% was predicted yesterday.
Technically, I’m expecting more upside from the bond market in the coming days, since price continues to assimilate 3 rate hikes, while in reality the odds are strong that we will only see one or possibly two before the end of 2017.
There’s numerous stops slightly above the current price level and if bonds rise just a bit higher, they will trigger these stops, and cause price to rally sharply over the near term.
Unless FED data becomes increasingly strong and and Global economy is not impacted negatively over the next quarter, we may see further decline in bond prices, but as it stands right now, there’s too much uncertainty to raise rates 3 times next year and that’s going to impact the strong downtrend that’s been developing during the last part of 2016.
The SPY broke the 20 day moving average as expected and is on it’s way to break the 50 day line to the downside.
I’ve been explaining time and time again that the overall market is grossly overbought and needs to pullback before moving higher, which is the scenario that’s playing out at this time.
If you look at the Dow Jones, you will see the extend of the momentum that’s been building up, since the majority of accumulation went into the blue chip sector.
I expect the Dow to violate the 50 day line before the end of January, which will cause defensive and commodity related stocks to rally along with the bond market and cause volatility to spike substantially higher than the current level we are seeing in the VIX.
As you can see in the chart below, the VIX is starting to increase in volatility, which means the level of fear in the stock market is rising and that means confidence in the upside is declining, which is the precursor to major selling pressure and the final step before the Dow Jones begins breaking down.
Unfortunately, I’m not expecting a runaway bull market in 2017 and expect the first quarter to undo much of the gains from the last quarter of 2016.
Wishing you the best for 2017 and beyond!