The battle between buyers and sellers in 2017 will begin on Tuesday.
The buyers are off to a good start with the S&P futures opening up +8.5 points on Monday evening. There is a lot of darkness before morning so anything is still possible. Even if the market opened higher there is no guarantee it will remain high. There are multiple reasons the market is expected to decline over the next three weeks but none of those reasons come with a guarantee. With the vast majority of traders already establishing short positions a blowout open could trigger a monster short squeeze.
I am not going to list all the reasons the market "should" decline because I have written about them repeatedly over the last several weeks. If we do get a sharp decline I view that as an excellent buying opportunity. I have a list of potential plays that we will be adding on a significant drop but since every stock reacts differently, we will have to wait and see who declines and who maintains their gains. If we do get a dip to 2,150 or lower on the S&P we could end up adding 10 positions for the longer term gains.
The S&P broke support at 2,250 and could easily reach the 2,185 level but it would take a persistent bout of selling to reach 2,150. It is entirely possible. However, I am sure there are plenty of investors hoping for the same buying opportunity so the dips are going to be very busy once we hit 2,185.
The Dow may be the biggest loser because of the monster gains from about a dozen Dow stocks. Some of them are very overextended and could easily drop 5% to 10% from their current levels.
The initial target for a Dow decline would be 19,250 but opportunists would like to see a retest of 18,850. That would allow stocks like GS, JPM and others to reach a level where buyers would be comfortable with new positions.
The Nasdaq broke two levels of support as the big cap techs collapsed the last three days. The rotation out of those big caps may not be complete because some of these positions have been in place for years. The initial target would be 5,240 but that does not represent much of a continued decline.
The small cap indexes have not broken down yet but there has been sporadic selling. A break below 1,350 on the Russell 2000 could start a chain reaction that punches through 1,300. The small caps were more overbought than the Dow stocks so the eventual decline could be significant.
There is a very heavy economic calendar next week with the ISM, jobs and the FOMC minutes. As always analysts will be ripping apart the sentence structure on the minutes and looking for evidence of an underlying tone that could point to future rate hikes. The market is already pricing in two hikes and the Fed suggested there could be three.
The jobs reports are not expected to show any material gains since the weak retail sector created fewer jobs than expected and there were layoffs in December. The payroll reports are not likely to move the market unless they are significantly different than the estimates.
This could be a rocky week with gains and losses as the end of year retirement funds are put to work and those waiting for the calendar to roll over for tax reasons are free to sell. There is no reason to rush into the market. The next three weeks are likely to supply a buying opportunity and we want to be ready when that occurs.
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