Market Observations for the Coming Week: The SPX continued to melt up on Thursday but the ISEE call/put ratio (137) reached a euphoric level Thursday into the important 12/8-12/9 turn window - we're looking for some kind of pullback into next week's Fed meeting. Bonds may be in a sizable 4th wave correction in time that could last into Friday - TLT puts with 12/16 expiration are still a good way to hedge a surprise downside move in the US bond market going into the 12/14 rate hike decision.
12/08/16 (Commentary for Thursday) The stock market "melted up" again Thursday but euphoric levels were reached in the ISEE call/put ratio as we entered the 12/8-12/9 turn window - we 're looking for some kind of pullback into next week's Fed meeting. New money flows and money rotation are keeping the market moving higher and every dip is being bought. Volatility instruments like the VIX and UVXY may have bottomed out early and did not register new lows into Thursday's close - we added to our Jan UVXY calls as a portfolio hedge. The market needs to rebalance sentiment here and just a small pullback in the SPX could yield a sizable bounce in the VIX. The SPX is up against a key multi-year trend line today and we may see an attempt to pull back into next week's Fed meeting. Our SPX target range for the year was 2200-2300 and we have attained that, so we are just looking for selected pullbacks in key groups like financials and materials to get long on dips. A scary 1-day decline to rebalance sentiment would be ideal but this stock market may not accommodate us. The anticipated Fed rate hike on 12/14 could still be a catalyst for a FAST MOVE to 3.0% (the Italian referendum only gave us a test of recent bond lows) on the US 10-year bond - we are hedging this risk with TLT put options that expire on 12/16. Gold moved higher but fell short of our "symmetry target" of $1190 and looks weak to us - a pullback into the 12/14 Fed rate hike may have started. Crude oil bounced on Thursday, but we held our USO puts for an expected leg down on Friday. The IBB (biotech) bounced back from the latest political attack on drug prices from Trump - we're still holding our BMY calls. The USD finished tracing out a "minimal EW a-b-c" correction on the hourly chart and reversed sharply higher on the ECB announcement early Thursday.
- Big Picture on Stocks (UPDATED) - The SPX and Russell 2000 continued in melt-up on Thursday and we added cheap UVXY calls for a portfolio hedge.
- Big Picture on PMs (UPDATED) - We're looking for gold to decline into the 12/14 Fed rate hike and then stage a big rally.
- Stocks - The SPX, DJIA and the Russell 2000 all powered to new all-time highs Thursday but the VIX reversed higher and didn't confirm the closing highs. We expect the high energy 12/8-12/9 turn window to give us at least a minor pullback here.
- Gold - Gold continued to be pressured by rising rates, however, because of the low VIX we scaled into some SLW, NEM, AEM, FNV, and NUGT calls for Jan 20 expiration. We're looking for gold to pullback into next week's Fed meeting.
- Silver – Silver looks stronger than gold and silver stocks are favored to buy on dips going into the Fed meeting next week.
- Crude Oil - Crude oil bounced on Thursday but we held on to our USO puts - looking for another leg down on Friday.
- Bonds - Bonds made an EW 5-waves down on the daily into October which confirms the start of a bear market and perhaps a generational low in rates. Bonds declined Thursday but may be close to a bounce on Friday. We're holding TLT puts to hedge a potentially FAST MOVE higher in US 10-yr rates going into the anticipated 12/14 Fed rate hike.
- Dollar Index – The USD completed a "minimal EW a-b-c correction" on the hourly chart early Thursday then reversed sharply higher on the ECB announcement to taper their planned QE in early 2017.
TURNING POINT DAY
The 12/8-12/9 turn window could be give the SPX at least a minor pullback.