Comments from the president and from Gary Cohn about fast tracking a tax cut proposal powered the market to new highs.
The Trump rally is not dead. After several weeks of dormancy, the markets reacted to comments that a comprehensive tax plan could be announced within 2-3 weeks. Traders cheered and the market broke through recent resistance to close at record highs. All but one broad market index closed at a new record level. The S&P-600 small cap index needs to gain another 9 points to 858 to make a record high.
There were some details leaked about the plan under construction but as with every "leak" we do not know if the details are factual, whether they are just a trial balloon or whether they will actually make it into the final draft. Reportedly, the top corporate tax rate will decline to 20%, no taxes on exports or repatriation of cash from other countries. Imports will be taxed. For companies that manufacture in the U.S. and export overseas, this will be a windfall.
Financials rallied on the president's comments about doing a number on Dodd-Frank and reducing regulations by 75%. While that is mostly wishful thinking and will be nearly impossible to get through the senate with only 52 votes, it did spike the financial sector on Friday.
The S&P punched through resistance at 2,300 on Thursday and then added another 8 points to close at 2,316 on Friday. There is a nice pattern of higher lows and any pullback could use that prior resistance as support. The ideal situation would be for the S&P to add a few more points on at least a couple days next week and somehow avoid any material decline on the other days. The dip buyers have been alive and well so that may not be too much of a challenge. If investors could keep this rally going through next Friday it would cement bullish confidence and cripple a lot of the bearish sentiment that has been holding the markets back.
The S&P did stop right at longer-term uptrend resistance at roughly 2,320. That will be the level to watch early this week.
The Dow surged to gain 169 points above the prior resistance at 20,100. The Dow has similar uptrend resistance but closed just slightly over that level on Friday. Sixteen Dow components are at or near 52-week highs. This is helping to power the index higher and it appears to be a different 5-6 stocks every day so we are getting a lot of participation. Support is now 20,100 and 20,000. Cisco Systems (CSCO) is the only Dow component reporting earnings this week. Cisco rarely moves the market and it is a low dollar stock so it creates very few Dow points.
The two Nasdaq indexes have been the market leaders with the biggest help coming from the Nasdaq 100 big caps. However, both indexes are now in overbought territory and I would expect some profit taking in the near future. When the market leaders pause, we have no guarantee the followers will not pause as well.
The Russell 2000 has been the market laggard but the financials lifted the index the last two days to closed about half a point over its prior high. While technically it is a new high, it was also a close at prior resistance. If the Russell begins to fall back next week, it could damage sentiment. If the Russell were to suddenly move higher over 1,400 it would light a fire under the entire market. The small caps are typically the market leader in both directions and it would be nice to see them lead us higher rather than lower next week.
We have a busy economic calendar for the week and Janet Yellen has two chances to aggravate the market in her semiannual testimony to the House and Senate. The Philly Fed Manufacturing Survey on Thursday is the most important economic report followed by the Retail Sales on Tuesday.
The earnings cycle is winding down and while there are a lot of companies reporting most are small cap companies that very few traders know. The next two weeks are known as the small cap earnings period. That means a lot of reports but only a few headlines.
This is also expiration week and February expirations can be rocky. The positions held over from the prior year are closed and traders begin to decide how they are going to raise money to pay their taxes. After a big gain over the last three months, there could be a negative bias to the expiration.
We have not seen a 3% dip since before the election and we normally get about three per year at 3% or greater. For our purposes, we need a dip to deflate LEAPS prices and give us some decent entry points. I know I have been saying this for months but it remains true.
That dip could come from the eventual realization that wishes and popular plans do not automatically become laws. They will face a grueling months long period of discussions, changes and party positioning before even being scheduled for a vote. Once this realization dawns on investors we could see some decline in sentiment.
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