View from Toronto Video: Looking for a Bounce Amid Pullbacks

02/06/2018 10:21 am EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

What will we be buying? The focus will be on North America, as the USD is more likely to rise on increasing demand, including Healthcare, Industrials, Technology. More from Ziad Jasani of the Independent Investor Institute, writing and videocasting on Monday.

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The S&P 500 (SPX) has pulled back -3.85% from the January 26, 2018 all-time-highs of 2,873. The S&P dropped 2 points Monday. The gap-down break of a tertiary accelerated uptrend line occurred on January 30 followed by two days of indecision, wherein the market was awaiting central banker dovishness, or at minimum no more hawkishness; this was the case on the January 31 FOMC Policy Statement.

However, U.S. Payrolls, and more importantly Average Hourly Wages significantly beat the forecast on Friday, Feb. 2, on the backs of Eurozone yields rising, and equities responded negatively.

Why? Policy makers allowed loose-monetary-policy (QE) to run rampant for too long, as inflation remained at bay. Now that signs of inflation are perking up, and equity markets made new all-time-highs in January 2018, the marketplace is worried that central bankers will be forced to raise rates faster than markets have priced in (currently three hikes in 2018), despite the FOMC’s recent affirmation of three-hikes only.

Rising rates usually lead to slower topline growth, and more importantly slower credit creation (the lifeblood of our fractional reserve global banking system).

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The S&P 500 has a fair chance to bounce up-off support at 2,752 with resistance of 2,835 more likely to hold, followed by another macro-market-swing-high. A stronger bounce would require another -1.7% to -3.05% of price erosion taking the S&P 500 to 2,715 – 2,678. However, if 2,678 (support) is broken, a correction down to the 200-day-average (2,532) becomes highly probable.

Why? The market is overleveraged long, and a rush to the exits would be like Lake Ontario being forcibly emptied through a garden hose; the hose nor the dam would hold.

We see a bounce, at minimum above 2,678 more likely than the dam breaking.

In fact, this week economic data is light enough, and earnings are strong enough to set the expectation of a mini-bounce up off 2,752 that fails to surmount 2,794 (resistance) and then a further drop to 2,715-2,678 followed by a much stronger bounce that could see us re-test recent highs.

So, what should we do? We remain net short equities (short-term capital) from Feb. 2 to start the week.

On Monday, we patiently waited for signs of selling-exhaustion before we pounced. Ideally, we test the 50-day average (2,715) and receive a swing-low-formation to buy-into closer to the back-end of the week.

What will we be buying? The focus will be on North America, as the USD is more likely to rise on increasing demand if/when the S&P 500 bounces up off 2,715:

Healthcare (XLV, XBI, XPH),
Industrials (XLI),
Energy (XLE),
Discretionaries (XLY),
Technology (IYW, QQQ, XLK),
Small Caps (IWM).

And if yields cool off, we will have a golden opportunity to play swing-lows in Defensive sectors:

Utilities (XLU),
Staples (XLP),
REITs (XLRE, VNQ)
and Telecom (IYZ).
It will take a direct move on the 10-year U.S. Treasury yield below 2.7% to convince us to foray into bond trades (TLT, AGG, EMB, BNDX).

Join experts at the Independent Investor Institute online for a complimentary deep dive on markets. The Live Session starts on Saturday, February 24, 2018, at 12 pm (EST) – 3 pm: Click here to register free

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