Get Ready to Jump on the Next Buying Opportunity

The major U.S. indices extended the previous week's huge post-election gains, led by the small-cap Russell 2000 (2.6%) and tech-heavy Nasdaq 100 (1.2%). Although the S&P 500 only added 0.8%, the modest advance was broad based, with all sectors of the index posting gains except health care and consumer staples. Financial, energy and consumer discretionary stocks were the week's best performers.

The focus of this holiday-shortened week will be two housing-related reports and the minutes of the early November Federal Open Market Committee meeting. Investors will be poring over the minutes on Wednesday afternoon for clues as to whether the Federal Reserve will hike short-term interest rates at the Dec. 13-14 meeting.

In last week's Market Outlook, I pointed out that the post-election rally positioned the benchmark S&P 500 index just below overhead resistance at 2,180 to 2,194. That resistance is officially being tested, but it will take a sustained rise above it to confirm the broader market's next leg higher is underway.

Investor Asset Flows Testing Important Threshold

One of the few market metrics that actually leads price sometimes is investor asset flows. And the latest asset flows data in the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) warns a minor pullback may be coming.  

The chart below shows that these assets rebounded from the $11.5 billion threshold in early November, right before the election, to trigger a rebound in the ETF, just as it had done on four previous occasions since May.

DIA Chart

Recently, though, these assets aggressively expanded back to the $12.7 billion threshold, a level that had closely coincided with every near-term peak in DIA -- as well as in in the positively correlated S&P 500 -- during the past two years. 

I will be tracking these assets very closely this week, looking for another decline from $12.7 billion, which would suggest another market decline is emerging.

Low Volatility Also Warns of Another Pullback

The next chart is one Market Outlook readers are undoubtedly familiar with. The Volatility S&P 500 (VIX) index declined last week as the market rallied. It closed Friday at 12.85, just above the complacent extreme of 12 -- a level that has either coincided with or closely led every near-term peak in the broader market index this year.

Especially considering that the S&P 500 is trading near its all-time high, I view the VIX's proximity to 12 as an invisible barrier that makes a sustainable rise to new all-time highs in the S&P 500 unlikely, at least without a minor pullback first.

Bigger picture, however, a bullish chart pattern in the Dow Jones Industrial Average, which I most recently discussed in the Sept. 6 report, continues to target a move to 20,400, 8% above Friday's close.

Rising Interest Rates Support a Better 2017

In last week's Market Outlook, I pointed out that the yield on the benchmark 10-year Treasury note spiked through formidable overhead resistance at 1.94% to 1.98%, confirming a major trend change in long-term interest rates and clearing the way for a test of the next important level at 2.32% to 2.36%.

The target was met last week as yields finished Friday's session at 2.34%, logging an incredible 78-basis-point rise since Sept. 29. The chart shows that the next overhead level is at 2.63%, which is the June 2015 closing high. But after such an incredible run, my work suggests these yields are likely to do a little backing and filling, perhaps back down to the 2.23% level or even lower, as long-dated Treasury prices (which move inversely to yields) rebound from their recent collapse.

Commodity Prices at Major Decision Point

In the Oct. 17 Market Outlook, I discussed the PowerShares DB Commodity Tracking ETF's (NYSE: DBC) late-September breakout from almost three months of investor indecision, saying it targeted a 6% run to $16.20. But DBC stalled in October before recently collapsing below the apex of the indecision area, negating the upside target.

The recent decline positioned the ETF right on top of its 200-day moving average, a widely watched major trend proxy that is currently situated at $14.35. DBC would have to hold this level and begin a new rally to indicate the major bullish trend change that originated in April is still valid and intact.

Conversely, a sustained decline below $14.35 would indicate this year's attempt at a new major uptrend in commodity prices has failed, and it would clear the way for a potential retest of the early 2016 lows.

Putting It All Together 

The S&P 500 hit a new all-time high on Monday, but low volatility while daily investor asset flows are testing an important historical threshold warns of another near-term pullback before new highs can be sustained. This pullback could coincide with a near-term correction in long-term U.S. interest rates as long-dated Treasury prices rebound, perhaps driven by investor assets temporarily moving out of stocks and back into the relative safety of government bonds. 

Barring a bear market in stocks, which I currently see no evidence of, any stock market decline that emerges between now and year end should provide a buying opportunity.

Editor's note: As you wait for a pullback, there is an income strategy that pays you to buy stocks at a discount. Warren Buffett uses this strategy, and I personally used it to help readers close 134 winning trades out of 140. Learn more before the next pullback gets underway.

[Market Outlook] Why I Can't Stop Talking About The 200-Day Moving Average
Premium Content  | Amber Hestla | February 12, 2019

Many investors hold strong opinions about the 200-day MA... but is it actually important?