RoboStreet – February 22, 2018
Bulls Beating on Overhead Technical Ceiling
The flashpoint for the stock market occurred on February 9 when the S&P 500 tested its 200-day moving average at 2,533 after which recovering roughly 65% of the decline from the all-time high of 2,872. Volatility remains prominent within the investing landscape as market participants are on high alert about what Fed policy might bring in the months ahead. Talk of four rate hikes for 2018 has pressured bond prices, driving the yield on the benchmark 10-yr Treasury up through 2.9%.
Clearly, the dual threat of rising inflation and rising interest rates is fueling investor angst as to how the stock market will adjust to both inevitable forces. So far, it’s been a bumpy ride and I expect more of the same tape action that can only be defined as a ‘headline driven’ market. Case in point was this past Wednesday’s release of the January 30-31 FOMC minutes that at first were received as dovish, sending the Dow higher by 300 points only to be interpreted shortly thereafter as if the Fed didn’t know if its current policy wasn’t hawkish enough. The Dow similarly reversed its gain and closed down by 166 points, making for another wild day.
Just yesterday, Goldman Sachs sent out a report to their clients that is getting serious attention this week. “Our projections would imply an evolution over the current cycle from the weakest labor market in postwar U.S. history to one of the tightest,” the economists said in a summary of their report. “We expect that a tight labor market and a more normal inflation picture will lead the Fed to deliver four hikes next year.” The cost of labor still makes up roughly 70% of corporate expenses and wage inflation evident.
With computer-generated buy and sell programs in full control of the intraday market swings, key technical levels are important to take note of in that a failure of the S&P to take out overhead resistance at 2,725-2,750 would incite a pull back. To what extent another sell-off would be is anyone’s guess, but since the S&P has rallied 200 points off its reaction low, a 100-point give back wouldn’t be out of the question. Most technicians would argue that another drop off would be very constructive and relevant to the bull camp to move beyond the fear of the Fed and embrace the stronger earnings story that is rapidly unfolding for the S&P 500.
This past Monday, the largest asset manager in the world just got a lot more bullish on U.S. stocks — claiming tax cuts are “supercharging” corporate profits. BlackRock expects stimulus from the tax reform will boost earnings growth this year by as much as 19%. Risks to this outlook include sparking inflationary pressures and rising rates, both of which could hurt margins and lead to price-earnings (P/E) compression.
But that’s more of a disclaimer. Strategists at BlackRock feel business spending plans, accelerating earnings, the pace of stock buybacks and dividend growth are still not appreciated by investors to the level they should be. FactSet released its most recent table of key metrics for the market now that 85% of companies within the S&P 500 have reported fourth quarter 2017 results. The findings support an extension of the rally based on accelerating earnings alone.
We should all make note of the fact earnings are the most important component of the overall health of the stock market. Investors will soon price in the expectation of core inflation running at 2.0% annually and 3.0%-3.2% yield for the 10-yr T-Note. It will signal to the market that the economy is healthy and attention should turn to the prospects of very strong first quarter earnings report period, led by the Information Technology sector, which makes up 62.13% of the PowerShares QQQ Trust (QQQ). If all goes according to plan and the market embraces what should be a stellar earnings season, my system is forecasting a probable move of 35% higher for the QQQ’s by July.
A lot can and will happen over the next six months that could curtail this hyper-bullish forecast, but within the uptrend there will be specific stocks that are in their own stealth bull markets and these are the technology gems we want to uncover that conform to the highest set of parameters within my system. It should be an exciting time to be long the right tech picks that stand to far outperform the major averages with such a powerful tailwind in place.
Maintaining the Goldilocks economy is first and foremost the objective of the Fed and as market embraces this view, as I believe it will, we could see a significant move to the upside over the next three months as investors price in these revised bullish metrics. The takeaway from this set of observations is that investors may have another chance to buy into a second market retest in the next couple of weeks and acquire many of our favorite Tradespoon stocks with outstanding six-month price potential at super entry points. Having the power our ‘always learning’ AI-assisted stock selection system at your disposal is a fantastic way to know which tech stocks to buy and when to buy them.
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