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3 Keys To A Santa Claus Rally

, I have 37 years of experience forecasting global financial markets.

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The benchmark S&P 500 (SPX) rose last week by 24.31 points or 0.9 percent to a new all-time high, and has now risen by a whopping 29 percent since early November 2016 — without a correction.  When a market comes this far, this fast, my number one concern for my clients, and myself, is to keep most of the gains accumulated during that period.  Accumulating stock market gains isn’t all that hard — the market inherently goes up.  Keeping those gains is a lot harder, however, and this involves knowing how to identify trouble at an early enough stage to do something about it.

This doesn’t mean we can’t continue to cautiously participate in the stock market’s current feeding frenzy, though — as long as we know where the dangers are and what to look out for.  In today’s report, I’m going to display and discuss three key metrics that should help to keep us invested — and also out of harms way — into early 2018.

#1> Bullish Investor Urgency: On Balance Volume Improved Last Week

The blue line in the lower panel of Chart 1 below plots daily On Balance Volume in the S&P 500 (SPX) since July along with its 21-day moving average, the latter which we use to identify its monthly (my firm Asbury’s Research‘s tactical time frame) trend.

OBV measures investor urgency to buy.

Copyright 2017 Asbury Research LLC

Chart 1

The rightmost green highlights show that, as of the end of last week, On Balance Volume edged back above its 21-day MA to indicate a trend of monthly expansion that, as the larger green highlight shows, is characteristic of healthy near term advances in SPX, most recently  the one between late August and late November.

As long as OBV continues to expand, it will indicate there is enough near term investor urgency to buy to keep the current market advance going into at least early 2018.

#2> Bullish Investor Conviction: Assets Invested Are Surging As Market Becomes Top-Heavy

The blue line in the lower panel of Chart 2 below plots the daily total net assets invested in the SPDR S&P 500 ETF (SPY) since September.  The red line plots these assets’ 21-day moving average, which I use to identify the monthly trend of either expansion or contraction.

Total net assets invested, which are derived from multiplying daily Shares Outstanding by Net Asst Value (NAV), measure investor conviction to buy and hold long positions overnight.

Copyright 2017 Asbury Research LLC

Chart 2

The teal highlights on the chart show that these assets virtually exploded, by $19.4 billion or 7.7%, just since November 24th.  This represents a huge 7% surge in investor assets during just the past three weeks.

In addition, the green highlights in the upper panel show that all of these new assets were added at SPX 2625 or higher, which means that a 51.00 point, 1.9% decline next week would put all of these new assets into the red — which could potentially trigger a deeper, long liquidation-driven decline.  But, above 2625, this relatively new money remains in the black, and happy.

#3>  The Near Term Trend: Still Our Friend

Chart 3 below plots the S&P 500 (SPX) daily since mid August in the upper panel with its 1-month rate-of-change (MROC) plotted by the blue line in the lower panel.  The green highlights in the upper panel show that the MROC has been in positive (bullish) territory since September 8th, and will remain so next week above SPX 2599 to 2579, which is currently situated 2.9% to 3.6% below Friday’s closing level.

Copyright 2017 Asbury Research LLC

Chart 3

So, putting our three keys together, the S&P 500 is amid favorable conditions to extend its 2017 gains into year end, and potentially into early 2018, as long as buying urgency, as measured by On Balance Volume, remains in a monthly trend of expansion and the S&P 500 remains above 2625.  A sustained decline below 2625, however, would put $19.4 billion of newly-invested assets in SPY, or 7% of the total assets invested in the ETF, into the red, and would be seen as the potential catalyst for a deeper market decline, perhaps to test the next important level at 2599 to 2579.

A sustained decline below 2579 would turn the currently positive monthly rate of change negative (bearish), which I would view as a key indication that a long overdue corrective decline is underway.

John Kosar, CMT, is Chief Market Strategist at Asbury Research LLC, a provider of technical and quantitative financial market research, and other investor services, to institutional money managers and high-net worth investors.