We finally made it to the end of 2016! What next? I just wanted to send out some brief thoughts as we wind down the year.
The asset allocators have been active this week and should finish up soon and then you will have some tax selling from folks who wanted to wait to sell in order to get the lower expected tax rates in 2017. The market knows both of these factors in advance and should discount most or all of it by the end of next week at the latest.
I would expect a little more downward chop into next week and then another rally to new highs into earnings reporting period.
However, since most intermediate term sentiment indicators are already stretched I do not think we go much above 2320 in January.
There is no doubt that consumer sentiment and CEO sentiment has improved dramatically since the election and may affect spending habits and forward guidance during the earnings calls in January.
The question will be what will be the response in the market? What is already priced in? What affect will rising interest rates have on mkt and economy.
In general, it would not surprise me if the economy outperforms the stock market since over the last several years the reverse was true due to the excessive dovishness by the Fed. People have been complaining that the market has been doing much better than the economy. Be careful what you wish for!
The main bet continues to be that the Trump win will unleash some fiscal tailwinds of lower taxes, lower regulations and infrastructure spending. There is no doubt those are mkt friendly. The question will be how much of it is already priced in and what laws will eventually be enacted.
Indicators
The 50 day moving average which is just below 2193 and moving up 3 points a day should act as good support. If we get there in the first week of January I think the market should hold.
As far as the indicators go the far and away winner for predictive value was the Vix term structure. As you can see fro the chart it accurately predicted almost every market low. Right now that indicator is still overbought as shown on the chart attached. The Vix itself at 13 is towards the low end of its historical range but well off the low of 10.93 last week.
The equity only put-call ratio has retreated somewhat from over optimism but would prefer a few more days of excessive put buying to get more bullish. See Attached.
Hedge fund exposure stand at 21.5% net long which is slightly optimistic positioning by hedge funds but normally important tops exceed 40% net long exposure.
The intermediate term Optimism Index is still showing excessive optimism as shown in the attached.