Analysts have one less decision this week but they still cannot make up their mind on market direction.
With the inauguration even risk behind us, there is one less thing for analysts to fret over. Unfortunately, they still cannot decide if the market is going to celebrate or profit take. I posted the graphic below in the Option Investor Newsletter a week ago. Over the last 11 presidential successions, the S&P has averaged a -2.59% decline in the first 30 days. Given our big post election rally we should have a better than average chance of some profit taking.
Offsetting that chance is the expectations for a big tax cut, offshore cash repatriation, the end of Obamacare, reduced regulation, an increase in new jobs, stimulus spending and all sorts of pro growth programs IF the new president can get his policies through congress. That is a capital IF but the reduced taxes and lower regulations are going to happen in some form.
With just the reduced taxes and repatriation of as much as $2 trillion in offshore cash, S&P earnings could rise as much as 16% in 2017. Portfolio managers are drooling at the prospect of strong earnings growth after the prior five quarters of an earnings recession. That means cash is poised to flood back into the market. If we did see earnings increase 16% and the current S&P PE of 17 remained the same, that would mean an S&P at 2,635. I am not predicting that, just doing the math.
Over the last six weeks the Dow, S&P and Russell 2000 have traded sideways. There have been multiple attempts to break out and break down and neither direction has succeeded. On the positive side, all of the dips were immediately bought. The S&P has traded 69 days without a 1% loss. You have to go back to 2006 for a longer streak.
I believe, if portfolio managers will buy the dips ahead of major event risk, they should surely buy the dips now that we are past that risk. Unfortunately, the S&P futures are down -6.5 points on Sunday evening.
By averaging the analyst predictions for the next several weeks you get a minor decline on profit taking and some earnings misses and then a solid rally into late spring. That prediction and $5 will buy you a Starbucks coffee but not guarantee success in the markets. We all know that the market will move in whatever direction it wants, whenever it wants and analysts will try to assign blame once the move is over.
As I have pointed out recently, the S&P candles appear to be clustering just below resistance in what could be preparation for a breakout. The Nasdaq has a similar pattern. If the S&P breaks over 2,277 to a new high we could see some significant short covering. If it was to break over 2,300, we could have a new leg higher that could run for some time.
The Nasdaq is only 19 points from a new high and Thursday's earnings will be critical for future direction. GOOGL, MSFT, INTC and BIIB all report on Thursday. That could either push the index to a new high or drop it back through support at 5,530 is there are disappointments.
The Dow is barely clinging to support at 19,800 after recovering from the Thursday drop to 19,732. Another drop to that level is not likely to spring back so quickly. There are 12 Dow components reporting earnings this week. There will be plenty of potential for big spikes and big declines depending on how those stocks react to earnings.
The Russell 2000 is typically the market sentiment index along with the Dow. With both of them at the low end of their recent ranges it would appear there is broader market weakness than is being shown by the S&P. I went through 300 small cap charts this weekend looking for short-term plays and only 16 of them were playable and only 5 would have been long positions. These were the worst charts I have seen other than in market corrections. This suggests we should be cautious about adding a bunch of new risk until we actually get a real market move. Sideways is not a market move.
The week starts slow with Tuesday the big Dow day and Thursday the big day for the Nasdaq. Stocks in purple are Dow components.
This is a busy week economically but traders will be paying attention to earnings rather than economics. We are in a kind of neutral period where economics are ok but not hot. They are ignored unless they miss the estimates by a mile.
With the S&P futures down -6.50 it suggests we will get a chance to test the dip buyer theory at the open on Monday. Of course we could see those futures reverse overnight so market direction is still a coin toss for Monday.
I believe we will be higher 90 days from now. I also believe we will see some profit taking somewhere in that 90-day period and probably sooner rather than later. I plan on buying any dip and would prefer that it happened about two weeks from now so that my target companies will have already reported earnings and survived the normal post earnings depression cycle. The market rarely does what I want so we will have to react to what it gives us.
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