U.S. Equity Markets Rally Without Any Economic Growth

Today the Dow Jones Industrial Average traded up to a high of 17,529.01, entering the 17,400-17,900 range where I stated that if I was a long term investor I would be looking to sell any long positions in equities, mutual funds, and/or exchange traded funds.

This is a phenomenal selling opportunity. If I was a long term investor I would not be complacent. I would take money off the table and then look for an opportunity to reenter the market after the U.S. equity markets sell off. Going forward I am looking for a pullback in the U.S. equity markets to an oversold condition on the daily charts, possibly bringing the Dow Jones Industrial Average into the 16,800-17,000 range where I would be looking to buy the exchange traded funds which mirror the U.S. equity markets. These exchange traded funds include DIA (Dow Jones Industrial Average), QQQ (NASDAQ Composite), SPY (S&P 500), and IWM (Russell 2000).

If the S&P 500 futures get to a significant overbought condition where they are over 100 points above the 10-bar moving average on the daily chart I will be providing a range of where I would be looking to:

1. Buy the exchange traded funds which move in the opposite direction of the U.S. equity markets. These exchange traded funds include DOG (Dow Jones Industrial Average), PSQ (NASDAQ Composite), SH (S&P 500), and RWM (Russell 2000).
2. Short the exchange traded funds which mirror the U.S. equity markets.

I am seeing a divergence in the U.S. equity markets with the NASDAQ Composite struggling to keep up with the other indexes. There is a massive amount of overhead resistance for the U.S. equity markets up at these current levels. I have a buy signal on both the daily and weekly charts for the U.S. equity markets. I expect this rally to last 4-12 weeks bringing the Dow Jones Industrial Average to a top in the April-May time period, possibly above the 18,000 level. In April-May of 2015 I called the market top when I stated that if the Dow Jones Industrial Average got into the 18,100-18,400 range I would be looking to sell any long positions and establish short positions. The Dow Jones Industrial Average got up to the 18,300 level and I then stated I was looking for a move down to the 16,100 range sometime in the summer of 2015 and the Dow Jones Industrial Average traded down to a low of 15,371. I expect the exact same scenario to occur in 2016, with significantly lower prices coming by the end of the summer.

Today the gap above on the weekly chart for SPY up to the 203.87 level was filled. There are now three gaps below on the daily chart for SPY. These gaps go down to the 182.86 level, equivalent to approximately the 15,500 level on the Dow Jones Industrial Average. I expect these gaps to be filled in 2016.

Back in December of 2015 I did not support a hike in the federal funds rate and I did not expect the FOMC to choose to do so. I was dumfounded by their decision to raise the federal funds rate as the U.S. economy was not showing signs of strength. After the December 2015 meeting the FOMC stated that they were forecasting four rate hikes in 2016 with a target of 3.25-3.50% by 2018. Yesterday the FOMC announced that they are now only forecasting 2 rate hikes in 2016. Many are calling for a rate hike at the June meeting. I do not expect any hike in the federal funds rate until after the presidential election. I believe the FOMC may choose to hike the federal funds rate once at the end of the year in order to save face.

The Dow Jones Industrial Average has rallied from the 16,200 level to the 17,500 level because of central bank intervention and short covering. It has not rallied due to a strong economy. If world economies were growing the Bank of Japan would not have gone to negative interest rates and the European Central Bank (ECB) would not have extended their quantitative easing program past March 2017 or increased their bond purchasing program. When the FOMC decided to lower their rate hike forecast it was almost a form of quantitative easing as they reassured the markets that they were not going to be aggressive. For the last couple weeks I had been stating that there was no way that the FOMC was going to look to hike four times in 2016. World economies are sluggish, there are no signs of inflation, U.S. 2015 four-quarter GDP was last reported at 1.0%, the U.S. is not creating high paying jobs, and the U.S. deficit is continuing to increase.

Today’s rally was fueled by the options expiration tomorrow, short covering, and yesterday’s FOMC announcement. After Wednesday’s close FDX (FedEx) reported better than expected earnings and revenue for its latest quarter. FDX also increased its earnings forecast for its business year ending in May. FDX was up 17.07 (11.83%) today, closing at 161.34 and providing additional strength to the U.S. equity markets.

At around 10:45am I got intraday buy signals on the U.S. equity markets and they never looked back. The Dow Jones Industrial Average closed up 155.73 (0.90%) at 17,481.49, the NASDAQ Composite closed up 11.02 (0.23%) at 4,774.99, the S&P 500 closed up 13.37 (0.66%) at 2,040.59, and the Russell 2000 closed up 16.74 (1.56%) at 1,091.25.

Long Term Signals:

NQ (NQ Mobile): Sell Signal on Daily Chart (03/16/16)
Entries: 3.99, 4.14, 4.29
Stop: 4.49
Status: No Fills

TWTR (Twitter): Sell Signal on Daily Chart (03/16/16)
Entries: 16.89 (filled), 17.59, 18.29
Stop: 19.27
Status: Short at 16.89

BBD (Banco Bradesco S.A.): Sell Signal on Daily Chart (03/16/16)
Entries: 6.83 (filled), 7.00 (filled), 7.17 (filled)
Stop: 8.00
Status: Short at an average price of 7.00

VRTX (Vertex Pharmaceuticals): Sell Signal on Daily Chart (03/17/16)
Entries: 82.82, 85.32, 88.32
Stop: 92.52
Status: No Fills

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

Crude oil is running into a massive stone wall in the 38-45 range. I would be looking to sell and scale out of any stocks in the oil sector within this range. When the U.S. equity markets start to break I believe crude oil will head back down.

If the U.S. equity markets continue higher crude oil may get up into the 42.50-44 range. Fundamentally nothing has changed for crude oil. Iran has stated that they plan to boost their crude oil output to 4 million barrels daily before they will even consider participating in a possible production freeze or cut. Shale producers will be pumping out 9 million barrels of crude oil daily. Crude oil inventories are at a record high (over one billion barrels worldwide) and are increasing further with production continuing to outpace demand. If OPEC did not choose to cut production when crude oil was trading near the 26 level there is no way they will cut production with crude oil around the 40 level.

Crude oil was up 1.74 (4.51%) today, closing at 40.34.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

On February 5th I got a buy signal on the weekly chart for gold with the close above the 1,131.30 level. Gold rallied over 150 points from where I got the buy signal on the weekly chart, trading up to a 2016 high of 1,287.80 on March 11th.

Gold has been telling us that the FOMC is not going to raise the federal funds rate anytime soon. I have been bullish gold but I waited for yesterday’s FOMC announcement, after which gold exploded to the upside. I am still looking for a pullback in gold on the daily chart for an opportunity where I would be looking to buy gold and the gold stocks. I believe the next push up in gold should bring it to or above the 1,300 level. I expect good opportunities on the daily charts in the next 3-4 months where I would be looking to buy gold and the gold stocks. The gold stocks I am looking at include ABX (Barrick Gold), AUY (Yamana Gold), GLD (Gold ETF), KGC (Kinross Gold), and NEM (Newmont Mining).

Gold was down 4.50 (0.36%) today, closing at 1258.60.

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