Last month we left off at a clear technical crossroads for the market as we were retesting the 2800 level on the S&P 500. We questioned whether this level would be resistance and send us back into the 2700-2800 range or if it could be support that would bounce us to new highs.
Well, the latter rang true as 2800 served as the support which would now thrust the S&P over 2900 and to within a couple percentage points of all-time highs.
This run was attributed to a few things:
US economy strong
According to the most recent Beige Book from the Fed, US economic activity expanded at “slight-to-moderate” pace in late March and early April. They expect growth to continue, referencing favorable manufacturing activity but additional uncertainty related to trade negotiations.
Possible China bottoming
China’s economy continues to show signs of bottoming. For the first quarter of 2019, China’s GDP grew at 6.4% beating estimates. In addition to this, their retail sales and fixed income investment figures also showed improvement over this time frame.
Recent comments from the Fed have led me to believe that they are going to let inflation run a little hotter. Fed Vice Chairman Richard Clarida mentioned that the Fed could let inflation temporarily run past 2% to make up for “past misses of the inflation objective.” This would be good news for stocks as asset prices should be getting “inflated” from this type of strategy.
Strong initial earnings
Earnings season has just kicked off again and we are off to a good start, especially from the financials. JP Morgan, Citi, Morgan Stanley and Goldman have all beaten estimates so far. And this is particularly interesting as this sector, largely considered “value plays,” have lagged the market for much of this rally. A little sector rotation here would be considered very healthy in my opinion.
Other relevant market headlines:
Lyft and Pinterest had IPOs
Two highly anticipated companies had market debuts, in opposite fashions. While Pinterest has been an early darling, Lyft has been getting pummeled ahead of Uber’s soon-to-be IPO.
Disney Plus announced
Disney stock jumped 16 bucks on the announcement of its streaming package. We have been anticipating this announcement since we wrote about it over a year ago in our Spector Spotlight: “Cutting the Cord.”
Chevron to buy Anadarko
Placing a big bet on the Permian basin, Chevron acquired Anadarko in a $33 billion deal. This has also led to a recent uptick across the shale-related names.
Apple and Qualcomm
Apple and Qualcomm settled a 2-year patent dispute which sent QCOM screaming higher.
What I’m looking at going forward:
Earnings season has just kicked off. We are off to a good start, especially with the financials who have been largely a “value trade” and have lagged other areas of the market. While this is a good sign, the vast majority of companies have yet to report. So it is still too early to chalk up a win here.
China economic data
While recent data has seemed very optimistic, it’s far from a done deal. I’m wanting to see signs of further improvement from China’s economy before I’m ready to feel comfortable about the market taking another leg higher.
China trade deal
Still hopeful for a deal which we have been hearing about this for a WHILE now. Honestly, a lot of the upside from this has to be priced into this rally in my opinion. While we would most certainly get a boost from a headline of a deal, it feels like any real follow through could be held back because of how long we have been anticipating this announcement.
From a technical perspective, the setup is very similar to where we were last month. While the 2900 level isn’t nearly as significant as 2800, this psychological level will be important in the short-term. I want to see us hold this level and would be a little cautious if we were to drop below but wouldn’t be too worried since we haven’t spent a whole lot of time trading here. If this level does hold, I’d look for us to knock out the all-time high of 2940 and set up for a real technical battle to go down at 3000.
But let’s not get too ahead of ourselves.
Here we are within a couple percentage points from the all-time highs. Momentum seems to be with the bulls as we continue this march upward. Charts and headlines alike seem to be backing them up as the market looks like it wants to break out. China and earnings will continue to be the main focus and will dictate where we go next.
For the meantime, it looks like we may ward off a recession and economies around the world could be gearing up for another leg higher. If that is the case, I certainly wouldn’t want to miss out. However, we have had a record run that has possibly priced in a majority of this good news. For that reason, I’d be very cautious as we approach new highs.
Stay tuned as we continue to navigate these markets together.