The weak tariffs, strong jobs, minimal wage growth and 18% earnings projections should support a strong market.
There is never any guarantee of future performance but all the factors are lining up for a positive market over the next couple of months. The economy is strong but still peppered with inconsistencies that should keep the Fed to its gradual pace of rate hikes into 2019. Employment is booming but the surge of people into the workforce is keeping wages manageable.
The tariff announcement and worries over trade wars, fizzled and became a non-event for the market. Lastly, after 15% earnings growth in Q4 the forecast for all of 2018 is for 18% growth. Tax reform will provide dividends and stock buybacks and the Q1 earnings cycle should produce a flood of those announcements.
The Dow rallied 440 points on Friday but it was a low volume short squeeze with only 6.9 billion shares. I am not surprised the volume was low since Friday's always have weekend event risk. Investors are always wise to wait for Monday before entering new positions. Fortunately, the S&P futures are up +10 on Sunday evening and all the overseas markets opened in positive territory.
If the market posts a decent gain on Monday it could enforce the upward trend and coax a lot more investors off the sidelines. The correction scared them and the up volume has been weaker than we would have hoped. If the advancing volume increases this week, it could set us up for six weeks of gains.
I have written for the last two months that I expect a rocky summer after the Q1 earnings cycle ends. All the good news will be priced in and the S&P could be as high as 3,000. All the good news will be priced into the market by mid May. With the Fed likely to hike rates at the June 12th meeting, this could be a convenient excuse for investors to take some cash off the table in late May.
For the time being we should focus on the expected market ramp into the Q1 earnings cycle. As long as we are not blindsided by some new political headline out of Washington, the market could have a very nice run.
On Friday, the S&P blew through the resistance at the 50-day at 2,741 and the psychological resistance at 2,750. The prior recovery high at 2,780 was also broken but is still in play. The S&P is about 3.1% below its record high close of 2,872 but we should get there before the Q1 earnings cycle.
It was also a banner day for the beaten down Dow stocks with half the components gaining more than $2. The stocks which were beaten down the most including Caterpillar and Boeing, had the strongest rebounds. The consumer stocks had the worst performance because they were expected to be exempt from tariff retaliation so they had not declined materially. Boeing had declined 35 points and Caterpillar had fallen 20 points.
The Dow closed above the resistance at the 50-day at 25,296 and the horizontal resistance at 25,250. The index did not close appreciably above those levels but it was still a good day. The Dow needs to close above 25,730 to clear that rebound high from two weeks ago.
The Nasdaq was being supported by the big cap techs led by Google and Amazon. In 2018, some 32% of the Nasdaq 100 gains have been produced by Amazon. The online retailer has gained 409 points (35%) in 2018. Netflix has rallied from $191 to $331 or 73% in 2018. These gains include the losses from the temporary correction.
I have written repeatedly since the correction that the Nasdaq was leading us out of the abyss and would be the first index to make new highs. Friday's record close should be a major sentiment boost to the rest of the indexes for next week.
The Russell 2000 pulled to within 13 points of a new high. This is the index to watch. If the Russell can breakout to a new high we could have a race into the Q1 earnings cycle. This would suggest portfolio managers are confident the correction is over.
The Q4 earnings cycle is over but there are still some stragglers with non-standard reporting dates. Thursday is the big day with Adobe, Broadcom and Ulta Beauty. There are a few more retailers including Dick's, DSW Inc, Williams Sonoma, Signet Jewelers, Tiffany, Hibbett Sports, Buckle Inc and Stitch Fix.
The calendar for next week has some high profile reports including the CPI/PPI indexes and the Philly Fed Survey. Retail sales could be interesting since 4.2 million people received tax reform bonus checks. The only reports that could move the market would be the CPI/PPI if they came in super hot on the inflation side.
This is also a quadruple witching expiration so there could be some early week volatility.
The FOMC rate hike for the following Wednesday is all but guaranteed so there is almost no uncertainty. The wild card will be the Powell press conference because the financial press will ask harder questions than the committees he faced a week ago.
Despite all the good news, we could see some choppy moves next week. The Nasdaq is in blue sky territory but the other indexes are lagging. As each of them hit their prior highs, and the Russell should be first, we could see that resistance take some of the momentum out of the market. I do not believe we are going to see another big decline but that is always possible. I expect the markets to continue higher but not at 3% to 4% per week. Slow and steady wins the race rather than three steps forward, two steps back.
Enter passively, exit aggressively!
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