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posted on 16 January 2017

Technical Update 15 January 2017

Written by , Clarity Financial

Technical Update

From a purely technical standpoint, there are a couple of things investors should be aware of as we head into this week.


This Is Interesting

I want to repeat this little blurb from Tuesday, only because it ties into last weekend’s newsletter as well.

“In ‘The Problem With Forecasts,‘ I noted the Dow is currently working on completing an advance of 5000 points over a 24-month span. The last time such a compressed advance occurred was during the 1998-1999 period.

But what about the S&P 500?"

Click on any chart below for larger image.

“Following the 1994 market lull, the S&P 500 began its first serious bull market advance as a wave of investors flooded into the market due to the introduction of online trading and the official opening of the “Wall Street Casino." From 1995 to its peak in March of 2000 the market advance (whole number basis only) by 1000 points over that 60-month period.

Of course, the subsequent correction of the “" mania reset the market by roughly 50% of that previous advance.

Following the crash, investors reluctantly began to return to the markets in mid-2003. As the Federal Reserve, and deregulation of Wall Street advanced, so did investors speculation in the markets as a real estate sub-prime lending took hold. Beginning in 2003, the market began a 60-month trek higher of 700-points before once again finding the limits of “fantasy and reality."

So, here we are once again. Over the last 60-months the markets have advanced by 1100-points, and 1400-points over the last 84 months, as Fed-induced monetary stimulus and suppression of interest rates have once again led investors to believe “this time is different."

Throughout history, as shown in the chart below, prices have ALWAYS, and I repeat ALWAYS, eventually found their limits. There has never been a “permanently high plateau" that inoculated investors from devastating consequences of misconceived and poorly managed investments."

As I noted above, when “extremes become the norm" that is the point in time where “danger lurks."

Back to Technical Review

First, as noted on Friday by Bespoke Investments (click on image for live tweet at Twitter)


In addition Bespoke says this is the 28th longest steak since 1928.

Not surprisingly, given the period of advance without a 1% decline, which has pushed prices to an extreme deviation above the 200-dma, the volatility index has dropped to levels that have historically denoted short to intermediate-term market peaks.

On a very short-term, daily, basis, the market registered a “sell-signal" from a very high level, something I discussed several times previously. While such a sell-signal does not always translate IMMEDIATELY into a correctional process, it has done so, particularly from these levels, more often than not.

This suggests that profit taking is still advisable until a new “buy signal" is registered.

With Trump’s inauguration next week, and an immediate flurry of action promised within the first 100-days, there is a significant degree of risk that an action, combined with extremes of the market as discussed above, could send market participants running for cover.

Some caution is advised until there is better clarity on a risk/reward basis.

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