Where Is The Bottom?

Yesterday, another selling wave hit Wall Street. The S&P 500 has now lost more than 10% in just 9 trading days. While in our semi-annually outlook published in December (www.cv-invest.ch) we were More »

US Dollar Countertrend Rally Ahead – Watch Yields And Copper

After losing 12% since beginning of this year, the Dollar Index has become heavily oversold and we expect a significant countertrend rally in the weeks ahead. On a daily timeframe we already More »

New Highs But Weak Breadth – Another Down-leg Before Rally Resumes?

Last week and early this week, some of the headline indices made new highs, which was very well received by financial media. Is the correction already over is it time to become More »

Relative Breakout In Goldminers – Don’t Chase Stocks Yet

As expected and explained in our outlook published in July, gold has finally broken above key resistance at USD 1’300. Not only has gold managed to move above the highs from April More »

This Is Not The Time To Chase The Market

Having entered a seasonally weak period for stocks, we do not recommend to chase stocks any further. Also the presidential and the decennial cycles do not suggest, that it is the time More »


A Look Ahead – Outlook H2 2017

Following US elections, global equities moved sharply higher. The S&P 500 has gained 17% and is now 4% below our 2’550 target. In the meantime, European markets have started to outperform, also thanks to pro-European elections in France, the Netherlands and Austria. Despite extremely rich valuations especially in the U.S. market and geopolitical tensions, volatility reached a 24-year low last spring. Do we still believe that the rally in equities is in its final stage? On the following pages we will try to find answers and provide you with a roadmap for the second half of 2017 and beyond.

A Look Ahead – Outlook H2 2017

Charts That Signal Only A Moderate Correction

Since we warned of the weakening technical picture and bearish cycles into October, there are a few very encouraging developments that could signal only a moderate correction in the months ahead.

First of all, the Dow Jones Transport index rallied strongly and reached a new high on Monday, negating the bearish Dow Theory signal. This is a very bullish signal in our view. Remember, a divergence between the Dow Jones Industrial and the Dow Jones Transport is often an early warning signal of a correction, last seen in early 2015.

Second, sector rotation. Since June 21st, commodity stocks are up 8% (STOXX 600 Basic Resources – SXPP) while the STOXX 600 has lost 2%. In the same period, banks gained 6% (STOXX 600 Banks – SX7P). These underperforming sectors have taken the lead again. Sector rotation should be seen as very healthy and reduces the risk of a sharp correction.

The chart of the STOXX 600 Basic Resources ETF looks increasingly bullish. Following sharp gains in 2016, basic resources stocks pulled back during the past 6 months. Now, the price chart itself and the RSI are both breaking their 2017 downtrend. Support is coming from copper. After our anticipated pullback in the first half of 2017 (successfully retested the 2011 downtrend), a break of the RSI downtrend and a bullish crossover in the MACD, we expect further gains in the metal.

Banks got a lift from hopes of further buybacks following the positive stress test in the U.S. and from rising yields. The U.S. 10yr yield has retraced exactly 38% of the July 2016-March 2017 rally. A bullish signal in the weekly RSI and record long positions in U.S. treasury futures are bullish signs. We expect the U.S. 10yr yield to retest 2.60% in the second half of 2017.

Our expectation of only a moderate correction doesn’t change our roadmap. Following a correction/consolidation into October, markets should make another rally attempt before reaching a major top in early 2018.

Entering Critical Season – Warning Signals Are Increasing

In our December 2016 outlook (A Look Ahead – Outlook H1 2017) we warned of a market top most likely in July/August. This is when the presidential and the decennial cycle turn bearish. Also, several of my most recent comments were about market breadth and the typical signs of major market tops.

As June is nearly over,  it is time to have a look at equity markets again.

Index divergences are one indication of a pending market top. Currently, the Dow Jones Transport Index still does not confirm the recent new high in the Dow Jones Industrial. Rembember, such a non-confirmation preceded the correction from 2015. Also the recent weakness in tech indices such as the Nasdaq and the Semiconductor Index is often a warning signal that something is wrong.

I have also talked about the percentage of stocks that reach a new 52-week high. In early June, when the S&P 500 reached a new high, 28% of all the index members traded at a new 52-week high. This compares to only 18% at the day of the most recent high (June 19th). In other words, the participation is falling. The index is lifted higher by fewer and fewer stocks.

We see a very similar picture in the percentage of stocks that are trading above the 200 day moving average. Since early March, this number is constantly falling, despite new highs in the S&P 500.

A mixed signal is coming from the advance-decline ratio. While the advance-decline line continues to move higher (good news), advance-decline volume does not confirm new highs in the index anymore.

All this, coupled with a divergence in the RSI, makes me increasingly worried that our prediction of a top in July/August might become true. The two cycles suggest, that we will have to go through a correction that could last until October. My feeling is that the July/August will not yet be THE top of this bull market. Following a low in October, we should see another attempt to new highs, accompanied by further lagging market breadth. Remember, major market tops form over the course of many months and bull markets almost never end abrupt. The toping process has started!

Emerging Markets Due For A Correction

Emerging market equities have led the way higher this year, as measured by the iShares MSCI Emerging Markets ETF (EEM), which has gained more than 17% year to date. At current levels (USD 41.39), the ETF faces strong resistance in the form of a falling trendline (USD 42.50) that connects the highs from 2007, 2011 and 2014. The weekly RSI is in overbought territory and turning south. Also, the ETF has nearly reached the price target of an almost perfect inverted head-and-shoulder pattern (USD 43). Last but not least, from an Elliott wave perspective,  the move off the November 2016 lows looks like a completed 5-wave sequence.

While the monthly chart continues to look healthy with the MACD about to cross the 0-line to the upside, we believe that emerging markets are due for a multi-week if not multi-month correction. A possible support zone is between USD 36.50 and USD 34.80, the 38% and 50% retracement of the November 2016 rally.


New Highs In S&P 500 And Nasdaq – What’s Next?

In our most recent posts I talked much about valuations and breadth. With the S&P 500 and the Nasdaq 100 reaching new highs, it is time to have a closer look at equity markets again. While it is good news seeing two of the headline indices making new highs, breadth is clearly lagging. For example the percentage of stocks trading above the 50day moving average shows a series of lower highs in both indices. The same applies to the 200day moving average. A rule of thumb says that in a healthy bull market, between 75% and 90% of all stocks are trading above their 150day moving average. Currently this percentage is below 70%. Also volume does not yet confirm the recent breakout. The only positive is the advance-decline line, which confirms the new highs.

With small- and mid caps still trading below their highs from late April and early March respectively, we have the classic signs of a mature bull market. Remember, small- and mid caps usually top out several months before large caps do. Another non-confirmation can be seen between the Dow Jones Industrial and the Dow Jones Transport, the Dow Theory. Regular readers of my semi-annually outlook know that the target in the S&P 500 for this bull market is at 2’550, a fibonacci projection, which I expect to be reached in July/August. This is when both, the presidential cycle for second term presidents and the decennial cycle start to roll over.

So far, this timeline remains valid. Should small- and mid caps follow large caps and reach new highs and/or breadth readings confirm the recent breakout, I would have to move forward the timing of a major market top.

Short-term, I expect the market to pull back. Weak breadth and divergences in momentum are all pointing to a correction in the coming days. Such a pull back should then be followed by another and likely final rally which should provide us with further divergences in momentum and breadth as the ultimate sign, that a top is near.