As of Friday, January 13, 2017 at the close of trading EquitySurge™ has continued a strong sell signal for USA equities.
Markets rotated again on Friday up near the all-time-highs, with the S&P500 Index closing up around 4 points at the 2275 level.
The S&P500 Index Futures keep bumping up against the 161.8% Fibonacci retracement level from the Summer highs to the election night low. In addition the daily candle bodies remain well below the level, with only some price spikes up to the level and a couple of occasions where price briefly got above but then turned back down. The first time price hit this Fib level was on December 13, 2016, and as of today, a month later, price has been unable to break above it, which has now created a strong resistance level. See the chart below:
We have been talking about selling into this post-election rally to take profits from long positions established earlier in 2016. Liquidity has been our stalwart guide in both telling us to get into stocks back then and telling us now to get out of stocks. In addition to liquidity concerns we are also seeing a flattening of the US Treasury bond market yield curve, an early but almost always correct prognosticator of coming equity price weakness.
One thing to be certain of is that the final tally on whether 2017 is going to be a good or bad year for stocks is extremely elusive right now. There is a strong case to be made that after a significant drawdown in stock prices of anywhere from 7-10 percent during the early part of the year, a fantastic buying opportunity will have been created. But there is also the possibility that 2017 could turn out to be a very tough year for stocks with the prospect of a bear market. Why the huge range in 2017 possibilities? In a word: Trump.
The president-elect has already proven to be extremely different from any other president-elect, and the surprises both positive and negative are sure to keep coming from this leader. What this translates into for the stock market is that companies may decide to take a wait-and-see approach to making big changes to business plans, including hiring decisions, capital expenditure and expansion plans, borrowing plans, etc. until such time as the “Trump Agenda” becomes more clear, and more importantly even, whether the Congress will pass into law the numerous changes that Donald Trump is talking about right now. This wait-and-see approach by businesses could end up manifesting as a slow down in the national economy, which would definitely affect the stock market.
So at this point a couple of weeks into the new year, and on the eve of Donald Trump’s inauguration as president, we have a stock market that has shot ahead in a catch-up rally since the election that is reflecting the very bullish conditions liquidity identified back in 2016, along with a strong dose of optimistic anticipation of what a Trump administration and a Republican-controlled Congress can do for the economy. But we also have liquidity now strongly warning us about continuing to stay long equites, a significant price resistance level right here, and a flattening yield curve, all of which argue convincingly to take profits on longs and wait to see if the coming drawdown in stocks will be an amazing buying opportunity or the opening salvo in what could be a bear market. The only thing clear right now is to get to cash.
If you would like to review the EquitySurge™ trading signals generated so far in 2016 please see the Trading Signal Performance Chart page.