The Bears Are No Match for Powerful Market Momentum
Here's my best trading advice right now.
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The indexes continue to chug along near all-time highs as optimism builds about the economy, and early earnings season results are better than anticipated. Bears have been looking for worries about inflation and a potential "sell the news" reaction to cause a pullback in a technically extended market, but it isn’t happening.
The action on Thursday was particularly notable for it was another day where market strength continued to build throughout the day and produced a close near the highs. Breadth was very strong, and the lack of intraday reversals to the downside is very bullish.
According to data from Bloomberg, S&P 500 earnings are on track for an increase of 3.2% in the second quarter versus expectations of 2.8%. That isn’t a big beat but so far it's good enough for strong support.
The bigger potential obstacle to a continued market advance is an uptick in inflation. However, both CPI and PPI were a little softer than expected, and now there is a Fed member — Christopher Waller — calling for a rate cut this month. The market isn’t reflecting a very high probability of that occurring, but there is increased pressure on Fed Chair Jerome Powell and his crew to take a more dovish stance, as there are some signs of weakening in the labor market.
The biggest problem for most investors right now is that both the indexes and individual stocks are quite extended, and there is a danger that earnings will not be strong enough to keep them running. Netflix NFLX, for example, had a solid report but is trading lower on Friday morning despite several price target increases.
My best advice right now is to try not to anticipate a market turn. Watch the price action closely and try to ride momentum as long as possible. Also, be wary of holding positions into earnings reports, especially if the stock has had a big recent runup. It will take some big blow-out reports to keep extended stocks even more extended.
We have a fairly quiet start Friday as we await consumer sentiment and housing starts reports.
At the time of publication, Rev Shark had no positions in any securities mentioned.
