For years market analysts talked about the Greenspan Put. Now we have the Powell Put.
Fed Chairman Jerome Powell lifted the markets on Friday by changing his tune once again. He flipped from hawkish to dovish after hearing the message of the market throughout the month of December. Powell cancelled the autopilot message on the roll off of the QE portfolio, called quantitative tightening or QT, and said the ongoing reductions in the portfolio could be adjusted accordingly if the situation warranted.
On the Fed current rate hike program, he said at this point the Fed would be patient and flexible towards future rate hikes. This coming only hours after a blowout payroll report with 312,000 jobs added in December, caught the market off guard and bullish investors celebrated while the bears were chased back into the forest.
Powell learned the lesson every new Fed chairman must learn. What sounds good on paper before a policy speech may create a negative reaction once those words are spoken in the speech. Fed economists live in a technical bubble, all 800 of them. When positions must be communicated to the investing public, Fed chairmen sometimes forget who they are speaking to and what made sense in the conference room meant something different to investors. In its simplest form this is called foot and mouth disease and all Fed heads must suffer from its effects until they learn how to talk to the investing public.
Fortunately, we should be insulated from any future disasters because we have his comments to fall back on and he has learned a valuable lesson that he is not likely to repeat. We can expect future revelations from on high to be more carefully phrased in order to maintain market stability.
The S&P futures opened on Sunday evening at +18 but have faded to +10 as I type this. After a big 747-point gain on Friday, I would expect some early week volatility but the longer term path should be higher. Tax loss selling is over. Portfolio managers are sitting on piles of cash and stock buybacks are going into hyperdrive with new announcements this earnings cycle. With stocks so cheap, companies will be getting more bang for their buck.
With Apple not dragging the indexes down, we had a good rally on Friday. Powell's dovish comments along with the blowout jobs report were what investors needed to hear.
The rally came in three stages. The overnight futures were positive and then the payroll numbers added to those gains. The S&P gapped open and then traded sideways around 2,520 for a couple hours. When Powell spoke the next leg higher began but stalled at 1:PM. The S&P traded sideways at 2,530 the rest of the day. The lack of a closing selloff was positive given the potential for weekend event risk. With the Dow up over 600 points there was a definite reluctance to continue buying in the afternoon.
Boeing was the big Dow leader and added as many Dow points on Friday as Apple removed on Thursday. The news of the resumption of Chinese trade talks on Monday this coming week, was a strong motive power.
Rising oil prices and a strong rebound in big cap tech stocks also lifted the index.
Prior support at 23,531 became resistance and that is the next level to conquer. The 24,000/24,145 level should also be a hurdle.
The big cap tech stocks were on fire on Friday after being decimated by the Apple warning on Thursday. All sectors, all varieties were seeing hand over fist buying. Alibaba was crushed on Thursday by Apple's comments of a consumer slowdown in China. After numerous companies said they were not seeing the same slowdown, Alibaba exploded higher with a $9 gain.
FANG stocks were soaring with Facebook the laggard with "only" a $6 gain. Any big cap tech stock was a winner on Friday.
The Nasdaq Composite is still 560 points below the 10% correction level and major resistance at 7,300 and above.
The Russell posted a major win with a 50-point gain and closed over the first Fib resistance level. The next hurdle is 1,409. Small cap investors should be celebrating with the relaxation of the Fed rate hike program. Higher interest rates have been a drag on the small caps since the "long way to neutral" comment on October 3rd and the top in the broader market.
Tech stocks rebounded the most on Friday and I would bet CES 2019 had something to do with it. CES 2019 is the largest electronics show in the world and it starts next week. Nvidia will kick it off with a giant two-hour press conference on Sunday evening. It will be live streamed HERE This is always an interesting presentation and the equivalent of looking 10-years into the future of technology.
IBM has the keynote speech on Tuesday at 10:30 and they will update on the Red Hat purchase and the future for their improved cloud.
The AMD CEO will also present a keynote speech at 11:00 on Wednesday. Dr Lisa Su has completely restructured AMD and they are well ahead of Intel on their technology. This could be a market moving speech for AMD.
The Philly Fed Manufacturing Survey on Thursday is the most important economic report for the week. This is especially true given the decline in the Manufacturing ISM to two-year lows last week.
The FOMC minutes of the last meeting will be on Wednesday and it will be interesting to see if the minutes reflect the new dovish comments from Powell on Friday or did he go through a sudden conversion over the last couple of weeks of market declines. Having everyone in the US mad at you could be a heavy load to carry. His baptism by fire with the market crash on his watch could have led him to a conversion experience.
The consumer price index on Friday has a lot less importance since Powell's comments on Friday. Otherwise investors would have been in panic mode for every tenth of a percent increase.
There are very few earnings next week, but the dam is about to burst. The following week more than 250 companies will report. For Q4, 17 S&P companies have reported. Earnings growth has averaged 15.5% with revenue growth up 6.2%. These are mostly smaller companies and the numbers should rise sharply over the next two weeks. Earnings growth estimates normally rise about 4% to 6% from the start of the cycle as positive earnings surprises appear.
There have been 42 announcements of positive guidance and 71 guidance warnings for Q4.
While I expect the market to move higher, I am not expecting many days like Friday and there will be some profit taking along the way. I would recommend hesitation on adding new plays on Monday. Whenever there is a monster spike in short covering, there is normally a pause where shorts try to reload and those already long decide to take the easy gains. This is an extremely short-term market where holding periods are a week or maybe two weeks if you are lucky. We should see a more positive bias but don't let your excitement overload your common sense.
Enter passively and exit aggressively!
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