The market rally is headed for a fork in the road with the president's speech on Tuesday evening.
This could be a pivotal moment for the market with the potential for a crash and burn, sell the news event or a new leg higher to even more records.
The key will be the tone, substance and delivery of the speech to the joint session of congress and the prime time TV audience. The market has been running on expectations for a major cut in corporate taxes, a significant drop in regulations, the replacement of Obamacare and a trillion dollar infrastructure spending program. So far, none of those expectations have come to pass but the deregulation portion has at least been started.
Investors will want to see Trump deliver a detailed speech in a calm presidential manner where he spells out coming attractions without a lot of hype and campaigning. That may be too much to ask of the citizen statesman. He is not a polished public speaker and viewers will be comparing his delivery to that of President Obama, who was an accomplished orator. I hope President Trump is successful because the market may not be kind to a less than stellar performance.
The Dow surged at Friday's close to turn positive only in the last 30 seconds of trading after rebounding from a 74 point drop at the open. This was the 11th consecutive record close and the longest streak since 1987. If the Dow can add two more days of gains it will be the longest streak ever.
The Dow is not as overbought as the Nasdaq 100 was last week but it is close. However, the index has benefitted from a new set of stocks leading it higher every day. There has been an interesting rotation sequence among the components.
As you can see from the chart below that 11 day string of gains is unsupported. The RSI has flattened out over the last several days but Friday's close at 81.79 is well below the 87.4 reading back on December 13th. The RSI and MACD don't tell us if the market is going up next week. They only tell us the degree of overbought and the potential for a reversal.
In this market, the technicals have not mattered. The market is trading on optimistic expectations. Unfortunately, reality has a habit of spoiling the party.
The Dow has a new target at 21,000 and closed only 179 points below that level on Friday. It is entirely conceivable that we touch that level on Tuesday and then position for a sell the news event at the close. If the performance is positive we could be headed even higher on Wednesday.
The S&P-500 closed at a new high on Friday after falling back to use 2,350 as support. The progress of the S&P has been a little more volatile than the Dow and last week's tight range suggests it could move higher next week. The RSI is hovering right at 80 and still overbought.
If we were going to see a normal 3% decline, that would only take us back to 2,300 and that level should be good support. That would be a good buying opportunity.
The S&P has gone 93 trading days without a 1% decline in a single day. If it can make it two more days, it will be the 12th longest streak since 1950. The longer the streak, the sharper the eventual decline.
The Nasdaq Composite has begun to show some cracks in the foundation. The indicators have rolled over but that simply shows the momentum has slowed thanks to a couple days of index declines. The 5,800 level was support on the dip and I would not be surprised to see it tested again.
The Nasdaq 100 ($NDX) declined enough over two days to subtract 5 points from the overbought RSI. The index is still overbought but those two declines did wonders for the animal spirits still in buy mode. They were unable to lift the index back into record territory but it was a decent rebound from the 28-point drop at Friday's open. The longer this uptrend remains intact the bigger the correction when it comes.
The small cap Russell 2000 has traded sideways since December 9th. The 16% post election rally has held but the index has been unable to add to its gains.
I looked at about 300 small cap charts this weekend and there were less than 25 that were bullish. I am surprised the Russell has held up so well with so many bearish components. If the index dips back below 1,380 I believe we could see a retest of 1,350 or lower. The MACD is about to turn negative.
The Russell 3000 chart is similar to the Dow with a stutter step at the top last week. It is encouraging to see the broadest market index duplicating the moves of the narrowest market index. This is confirmation this is a broad market rally at lease in the big caps indexes.
I have shown this chart periodically over the last year. This shows the expected move on a technical breakout from the 2015 consolidation pause and the early 2016 market crash. The range of the two-year consolidation was 324 points. That suggests a breakout or breakdown will run about 324 points. That targets 2,458 on the upside and the S&P closed at 2,367 on Friday. This chart is not time dependent so there could be pauses in the breakout and still be valid. However, when/if the 2,458 level is reached, that would be a bearish signal on a technical basis.
I built this chart after the January dip in early 2016 and I have changed nothing since then. This is a control against letting short-term market bias get in the way of longer-term market direction.
Hopefully investors will find something in the speech that gives them confidence and keeps them in the market. However, even if we do get a sell the news decline, it does not mean the rally is over. It would only mean the optimism is being reduced. Long term, there will be policy changes and they should be good for the economy and that will keep investors interested for the rest of 2017. The dips will continue to be bought, but they may be deeper than what we have seen since last October.
I do not see any potential for a bear market unless the border tax is implemented in a way that causes significant inflation or even a recession. All the rest of the proposed policies are market positive.
Enter passively and exit aggressively!
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