ManyWaysToTrade Analysis & Market Outlook – 02/20/2017
Stocks broke higher last week again on tax reform rhetoric registering a 1.5% gain for the S&P 500. The gains were broad based as all the major indexes rose to achieve new all time highs last week.
Three quarters of the S&P 500 stocks have released their Q4 earnings. Revenues are up with earnings up even more. This means that companies are growing the top line but are also running more efficiently in growing the bottom line as they are squeezing more profits out of each additional dollar of revenue they produce. This is a very healthy statistic.
While revenues and earnings are up, neither are up “bigly” 🙂 This reflects the economy continues to move in the right direction but it isn’t running at full steam. That is where the rub comes in.
The stock market is a forward looking machine that factors future expectations into today’s prices. Right now all the expectations are on looser regulation, reduced tax burdens, repealing Obamacare, and corporate repatriations.
Unfortunately, each one of these items is gargantuan in scope, not to mention as a group. Successfully achieving just one of these items would be quite an achievement. The market has pinned its hopes on all of these happening and happening soon. That is where things may disappoint.
The market has achieved lofty levels and the longer it takes to see tangible results, the more impatient the market will get.
Below we provide 2 charts: A 1 year look at the S&P 500 and the VIX.
The S&P reflects a strong uptrend which has pushed the Relative Strength Index (RSI) to a very overbought level of 77. The last time RSI read this high was mid-December when a quick 2% selloff occurred before returning to the highs.
Also of interest at the S&P’s current level is the distance above the 200 day moving average. At >8% of the 200 day the S&P is further away than it has been in the last 12 months. Each time the rubber band has stretched to this extreme a check back to the 200 day has materialized.
Historically stocks are week during the shortened President’s Day holiday trading week. Considering Friday’s close at 2351 after such a strong breakout it is our expectation to see some weakness this coming week.