posted on 29 January 2017
Market Review - Risk/Reward
Since the November election of Donald Trump, the investing landscape has gone through a dramatic change of expectations with respect to economic growth, market valuations and particularly inflation. As I noted two weeks ago, there is currently "extreme positioning" in many areas which have historically suggested unhappy endings in the markets.
We can also witness the rather extreme extension of prices above the 200-dma. Such extensions, which are always combined with extreme overbought conditions, have typically not lasted long and have been a good indication to take profits in the short-term. This provides some opportunity to invest capital following a correction to some level of support.
Buy The Dip? Probably.
HedgEye had a good note on why the market keeps going up against what we would deem to be rational behavior:
A "buyable correction" would suggest a correction back to recent support levels that keep the overall "bullish trend" intact.
The chart below shows the recent advance of the market has gotten to extremely overbought conditions on a short-term basis and the 'sell signal' noted at the top of the chart, combined with the extreme overbought condition at the bottom, suggest a potential correction could take the market back to 2200. Also, note the negative divergence of the PMO oscillator despite the advance in the market.
While such a correction would be relatively minor in the short-term, it would also violate the bullish uptrend that has held since the 2016 lows.
However, putting this into an actual loss perspective, the following chart details specific support levels back to the psychological level of 2000. A violation of the 2000 level and we are going to start discussing the potential for a more severe market correction.
A violation of initial support level sets up corrections of 4.9%, 6.6%, 8.6% and 13.2% from the recent highs. With bullishness running at highs, and cash allocations at lows, the risk of a short-term reversal is high.
However, I am certainly not discounting the short-term ability for the markets to move higher as discussed in "2400 or Bust!." This is particularly the case if fiscal policy is actually implemented, earnings improve more than expected or additional monetary policy is introduced. But it is the risk of loss that currently outweighs the reward.
However, there is another more extreme view that was put out by Matrix Trade late last week:
Like a dealer at a poker table enticing players into a game:
>>>>> Scroll down to view and make comments <<<<<<
This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved