Market conditions are challenging, and investors are facing a hard time with lots of volatility over the course of the last 24 months. gold, for instance, rallied strongly this year until right after the Brexit. Likewise, crude oil doubled in price this year after it went through its steepest collapse in history.
What can we expect next year? In other words, which investment ideas do we see for 2017? To answer that question, we identified 5 assets with an amazing chart setup.
Before looking into the details though we have to say that markets will probably not be an easy read in 2017. Our conclusion is based on one of our key strategic indicators: the bonds to stocks ratio. This ratio is a measure for risk among investors, and, as shown on the first chart, it is flirting with a long term trendline. As long as this ratio remains in the triangle pattern, market conditions favor stocks; a trend remains a trend until proven otherwise.
Given the trend in the bonds to stock ratio, which favors stocks until proven otherwise, we prefer stock markets above ‘risk-off’ assets. The S&P 500 chart setup is about to confirm (or invalidate) that statement. As seen on the chart below, stocks are truly at a make-or-break level. If—and that’s a big IF—the 2100 points level holds, then U.S. stocks will be a great investment idea for 2017, and investors can forget the stock market crash scenario.
Depending on how the stock market will trend in 2017, investors should keep a close eye on the biotechnology sector for two reasons. First, biotech tended to be a leader but became a laggard since last year, and it has been consolidating in a narrow range since then. Second, its chart setup (via the iShares Nasdaq Biotechnology Fund (NASDAQ:IBB)) is a text book example of a big move coming, either to the upside or downside. If the stock market as a whole would become bullish, then we expect big profits in biotech stocks in 2017.
Furthermore, we did spot another great stock investment idea for 2017: financial stocks. After the 2009 crash, the finance sector has been suffering, and the sector was clearly not a market leader. However, that could be changing. With interest rates on the rise, the relative strength of the finance sector is close to breaking out from a secular downtrend.
Watch the following chart, we believe this is truly amazing, as really nobody is expecting the financials to outperform the rest of the market. As it usually goes, big breakouts happen ‘under the radar’, and so we tend to believe that finance stocks could be become a great investment idea for 2017.
The commodities space looks slightly inconsistent at this point.
Copper, for instance, seems to reverse from a cyclical downtrend. The chart below makes that point, as the price of copper broke through a 14-month resistance point today. We see an easy move in copper from $2.30 to $2.60 in the coming months.
On the other hand, gold looks different. Though copper and gold would be expected to move in the same direction, we observe an inconsistent move, at least in recent weeks. The only explanation that makes sense is that ‘risk-on’ sentiment is entering the market, which would favor copper as gold is behaving more as a ‘fear asset’ (which is why it rallied in the first months of 2016, driven by panic in markets). Our bearish gold price forecast for 2017 would materialize if the $1250 level does not hold.
In sum, we expect that 2017 will bring investment opportunities in stocks and especifically in financials. Shorter term, copper looks very enticing.