Market Technicals Suggest Investors Purchase Pullbacks

Market Updates

Market Technicals Suggest Investors Purchase Pullbacks

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses the current market environment and potential pullbacks in 2017.

February 24, 2017

The bulls remain in control as equities continue to march higher. Although we fully expect pullbacks to develop in 2017, “fighting the tape” looks like a losing proposition. In the coming months, pullbacks are likely to be short and shallow if they develop. Yet, as the year progresses, adequate fiscal reform will need to be in reach, economic growth must be sustained, and expected earnings growth must follow through or we think the equity market will likely be hit with a meaningful setback given the current extreme levels of bullishness and excessive valuation. For now, we suggest investors enjoy the ride and act on the pullbacks.

In the current environment, we suggest new capital commitments should be targeted for positions with the strongest fundamentals as they become less extended on the price charts. Additionally, accumulating rotation and pullbacks at the sector level should enhance returns. Energy and Materials have experienced such pullbacks and look timely to us. Even the out‐of‐favor Health Care sector has registered momentum in recent weeks. If the sector does not roll over, we think accumulation is justified.

Technicals remain healthy. Evidence of current strength for the equity market was on display recently, as the S&P 500 shook off a potential bearish “island reversal” technical pattern (when a gap higher is quickly followed by a gap lower, leaving the prices between the two gaps on an island) and rallied to a new price high. After the rally, the short‐term technical price target generated by the recent breakout near 2330 has been surpassed. This occurrence, along with overbought technical readings, suggests a consolidation period is due. Overall technical strength in conjunction with fundamental readings supports buying weakness as downside appears limited, in our view.

Longer term: The intermediate term technical price target of 2450 remains in place. Absent any setbacks regarding fiscal reform or a loss of economic momentum, we think the equity market is likely to see such levels this year. Although the price is just 3.5% higher, we are not convinced equities will broach the level in short order. The magnitude of the rally off the November low (+13.4%), which annualizes at 50+%, along with overbought technical readings are likely to delay the price target for a bit longer.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.



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