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posted on 19 November 2017

Prepping For A January Correction - Review And Update

Written by , Clarity Financial

Happy Thanksgiving

If you have been a reader of my weekly missives in the past, I have often spoken of my family and the valuable time we spend together. My lovely wife is a person of strength, character, love and generosity to which I could only hope to aspire to someday. She is truly an amazing person. A full-time sales rep for a major company, a full-time mom, and a full-time "traditional wife" in our marriage. She is the tie that binds our family together.

And she never complains.

So, next week, I am taking her on a quick trip for a bit of sun and relaxation. As such, I am unplugging for just a couple of days to focus on her and let her know how "thankful" I am for having her in my life.

While there will be "no newsletter" next weekend, I promise to be back on the keyboard after Thanksgiving, just a little bit more "tan" and relaxed.

I am also very "Thankful" for all of you who read this missive every week. Over the years, your kind words and emails have inspired me to continue producing the work each weekend. Michael Lebowitz and I are looking forward to bringing you a whole new suite of tools, research, and insights in the New Year.

Thank you again, and I wish you all a very Happy Thanksgiving.

Review & Update

Last week, I discussed the potential year-end setup for a January correction. To wit:

"It is the turn of the calendar where I see the potential for a bigger correction. Come January, I think there is a high-likelihood of 'tax selling' by fund-managers to lock in gains, particularly if 'tax reform' legislation has passed, as taxes won't be due for 21-months (assuming late filing.)

That selling, combined with concerns over the Fed's rate hike in December and reduction of the balance sheet, could facilitate a deeper correction of 3-5%."

Chart updated through Friday

Two things occurred this past week:

  1. Last week, I stated the internal deterioration of the market suggested continuing weakness in this week. Even with the strong rally on Thursday heading into the passage of the "tax bill," the markets still finished -0.13% lower for the week.
  2. Importantly, the continued weakness trigged a MACD "sell signal" as shown above. Such signals have often led to short-term corrections, or worse, in the past.

This coming week is Thanksgiving week which is traditionally an extremely "light" trading period where the "inmates are running the asylum." With the market more overbought now than at any other period since 2011, a consolidation or further corrective action is entirely possible.

While some "caution" is advised, it is NOT advisable to act "emotionally" to swings next week due to the low volume trading that will be occurring.

While the market is extremely overbought, the bullish trends remain intact. Furthermore, the last two months of the year are typically bullish for asset prices. Understanding this, these conditions keep portfolios allocated towards equity risk currently. But we do so with an eye on the risk.

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