The market is back at that point where the expectations of a new high is pulling prices higher.
The closer we get to the prior highs the stronger the magnetic pull on the market. Investors can see the target and the narrowing distance, and they become convinced it is going to happen. They rush in off the sidelines in a fear of missing out rally. Unfortunately, once the target is reached, the excitement normally fades. Without a target there is no visible obstacles to overcome.
The deal with Mexico, both real and imagined, put the market back at ease and helped convince some investors that there would be an imminent deal with China. President Trump said today that he will put additional tariffs on $300 billion in Chinese goods if President Xi fails to meet with him at the G20 meeting at the end of June. That is as close to an outright threat as you can get. Even if Xi was planning to go to the G20, now he has a reason not to go. It would appear that he was appeasing Trump and he would lose face in China. While going and working out a deal would be the right thing to do for China, he may be unable to make the right choice because of appearances.
Closer on the calendar is the FOMC meeting next Wednesday. The Fed is expected to wait until the July meeting to cut rates, but we can never be sure. While the market would celebrate an unexpected cut, there are analysts who believe it would be the wrong signal and could be detrimental to the market. Cutting rates suggests the Fed believes there are problems in the economy. While investors cannot see those problems in a convincing fashion, the Fed must see them so it is time to exit stocks.
There are plenty of visible problems in the market. A sharp decline in earnings, falling economic indicators, slowing job growth, weakening global economy, trade wars, etc. This is a wall of worry for the market to climb but sometimes the weight of the bricks causes the wall to collapse on the market.
The S&P is only 58 points or about 2% from the prior high. This is the tractor beam that is pulling the index higher. The strong resistance at 2,872 was broken and the 2,930 level is the next target.
The Dow is retesting the resistance at 26,191 and that would be an excellent spot for profit taking. The right side of the chart is setting up for a potential H&S formation that could predict a return to 24,500.
The Nasdaq is facing two mediocre resistance levels but the one at 7,840 held at the close today. After the big 500+ point rebound from last Monday's lows the Nasdaq needs to rest. This would be the perfect spot for a pause.
The small caps continue to lag the big caps and there are far more small stocks. The big cap techs and industrials powered the rebound, but the Russell 2000 is a reluctant participant. This could be the weakness that drags the market lower.
The calendar is lackluster with the inflation indexes the two key reports for the week. They could produce some volatility if they suddenly show some inflation entering the system. That would put the Fed back on hold and increase uncertainty.
The market has entered strongly overbought territory with the post Mexico gains today. We are due for a rest but that new high catnip is a powerful force. If we do reach the prior highs, there is a very good chance of a sell the news event given the major gains just over the last week. I would be careful in being overly long.
Enter passively and exit aggressively!
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