Saturday, December 31, 2016

2017 Outlook (12/31/16)

Happy New Year!

Our 2016 outlook has largely been on target. We projected the following possibility at that time:

Risk On, 2016
a. A potential fourth wave in stocks is likely to bottom in 2016
b. Key commodities are approaching their Fibonacci moments in 2016 for a potential low.

Stocks did find a significant low in February 2016 and SPX rose nearly 26% to its December 2016 high. Gold bottomed in late 2015 and advanced 28.5% to its 2016 high. WTI crude oil has more than doubled since its February 2016 low.

In contrast to 2016, the outlook for 2017 is more ambiguous due to the lack of structural clarity (See below). Thus, it is even more prudent to consider the bull and bear cases in stocks, bonds, USD and gold.

The advance for SP500 since its Feb 2016 low lacks the typical profile of an impulse wave (Chart S1).  This introduces a number of interesting implications on the post March 2009 bull market (Chart S2).

[pink] The potential 5th wave advance is of a lower degree, namely wave (5) of wave [3]. The proposed wave (5)-up is likely to conclude soon, to be followed by wave [4]-down.

[blue or red] Wave [4] pullback is still in progress. 2017 should see a retest of the 2016 lows.

[green] Wave [5]-up tracing out an ending-diagonal-triangle. Wave [5] will reach time-equality with wave [1] in March/April, which marks a Fibonacci 8-year duration of the current bull run.

Despite the surge in long-term interest rates, much uncertainty remains regarding whether the large interest rate cycle has indeed turned up. For example, Chart B1 highlights a couple of paths where long-term rates can stay lower for longer. Chart B2 tracks the nearly 1% rise in 10-year yields based on the possibility of an impulse-wave or a corrective wave.

The USD index is at a key resistance zone - a Fibonacci 0.618 retrace, end of a potential flat (red) or a small-degree five-wave advance (blue) (Chart $1).  While the USD index can continue to advance significantly (green),  a pullback (blue) or a reversal (red) should not surprise.

We suspect that one of the two tracking scenarios will likely to play out in 2017 (Chart G1). Both scenarios suggest that the bear market in gold prices since 2011 may not be over. Chart G2 tracks the roller-coaster ride in Gold prices since it's 2016 low.