Feb. 7, 2016, Weekly Summary: Hard Not to Panic, but it Still Looks Like a Correction

Thanks to a Friday pounding, the SP 500 closed down for the first time in three weeks. Payroll and unemployment numbers seemed to confuse the equity and gold markets in different ways; equities down, gold up.

The payrolls came in under expectations (151K, expected 180K) which should give the FED pause, while the hourly earnings came in above expectations (+0.5%, expected +0.3%), and the unemployment rate fell to 4.9%, both of which look inflationary and could push the FED to raise rates. The equities seemed to think the FED would raise, and sold-off, while Gold seemed to be following the CME FED tool which is registering a 100% chance of the FED holding rates steady on March 16th. The fact that Gold rallying is the more rational response to a no rate hike scenario than the equities falling is, adds confidence to the correction hypothesis for the equities market.

Our Price Modelling System dropped back to neutral thanks to Friday’s weakness, and we are still looking at sentiment to help us calculate the likely-hood of a sustained bear market in the making.

In the chart below, the blue vertical lines indicate the local minima on the SPX, and notice how they line-up with maxima in the Rydex Bull/Bear ratio, and with minima in the Rydex Bull Assets. The sentiment indicators show a slight increase in bullish sentiment, and a decrease in bearish sentiment (green arrows) in most cases. In every case, a rally follows. Will we see a rally this time? No one can say, but the probabilities seem stacked on the side of at least a relief rally, not a prolonged bear at this time.

Now, let us look back at the situation during 2007-2010 (see below). Notice, again. that there are rallies after every marked minimum, and that the bottom in March of 2009 stands out for its extreme readings in both of the Rydex indicators. None of this, of course, guarantees anything, but chances are that we get at least a short-term rally.

The fact that the economy, while it has yet to reach escape velocity, is in much better shape than it was in 2007, adds weight to the probability that we are not at the start of a bear market. The SP 500 dividend yield is a healthy 2.33%, which is higher than it was in 2007 when interest rates were much higher.

The corollary to that is, since the economy and the PE of the market are already higher than in 2009, there is not as much room for upside either. We may not be falling as far, but we’re not going up that far either. We still hold that the most likely future is a trading range between 1900 and 2100.

Quelle: Nicholas Gomez