Earnings season cause markets to surge

After a week of low volume consolidation, all three averages broke higher on Friday. The bulls are still in charge and seem determined to push stocks back to their all-time highs. A trigger could be this year’s first quarter earnings season, which is upon us, some of the multi-center banks reported today. They did not disappoint, beating estimates handily and expectations are that most of the big banks will also beat earnings estimates. That won’t be too difficult to do given that earnings estimates have been down-graded not once, but twice, over the last three months. Overall, the Street is expecting companies that comprise the S&P 500 Index to report a decline in earnings this quarter (anywhere between 2.5 to 4%). As such, it won’t take much financial engineering for companies to beat these low-ball estimates. With that same index less than 1% from its all-time highs, I would expect that next week we should see that level at least touched, if not broken on the upside. Be advised that the S&P 500 Index has been up 10 out of the last 11 days. That is an unusual performance, but it doesn’t mean that string of gains needs to be broken any time soon. On the contrary, stocks could climb and climb until the last buyer has committed to the market before falling. It usually happens that way when the bull becomes a thundering herd. But it is not earnings that are propelling the markets higher, it is the Fed’s easy-money policy stance. As long as that program remains, stock prices will be supported both here and abroad. Overseas,...

Markets on a tear

As fearful as investors were back in December, the greedier they have become in April. Investor sentiment is climbing, interest rates are falling, and the Fed is on hold. All we need to push the markets even higher is a trade deal with China. It’s coming. The S&P 500 Index has tacked on a hundred points in nine days. The all-time record highs for that index is at 2,940 less than 50 points away. That index has been up seven days in a row. The Dow is  up 6 out of 7. Last week’s worry, the inverted yield curve, which occupied everyone’s attention, is a barely remembered footnote as buyers rush to own stocks. Of course, there are warning signs sprouting up throughout the markets. The Algos and computer-driven “Bots” are pushing the indices beyond their limits. Plenty of strategists are warning that the markets have come too far, too soon. They are probably right, but they were probably right one hundred points ago. If we all know this, then why not get out while the getting is good? The simple answer is no one knows where to get back in. You might say “I will wait until equities become low enough to offer fair value.” The problem is that no one knows what that means anymore. We live in an environment where markets are pushed to extremes without much, if any, fundamental reason. Markets go higher “just because.” And if that is the case, there is no telling when the flipside of these gains will occur. Every day there is a 50/50 chance that stocks will continue higher,...

Does the Fed know something we don’t?

Sometimes too much good news can be interpreted badly. Take the U.S. central bank’s about face on monetary policy late last year. That was good news and investors responded by bidding the stock market up by 20%. But this week we may have received even better news, or did we? The Fed did more than met investor’s expectation this week at the central bank’s monthly Federal Open Market Committee meeting. Chairman Jerome Powell indicated that there would be no more interest rate hikes for the remainder of the year (after saying back in December that two rate hikes were on the table for 2019). There was even some discussion that a rate cut might be possible, if conditions merited such a move. One would have thought that would send the markets flying, and they did, at least on Thursday. Friday, however, the opposite occurred. Granted, the reaction could simply be dismissed as a “sell on the news” moment or algos playing their daily games. If so, nothing more needs to be said. But I ask myself–why would Powell and the Fed be contemplating a rate cut? The news startled some analysts and left them asking questions. Is the economy weaker than most suspect? Has the slow-down in the global economy infected the U.S. as well? Afterall, the Fed did lower their forecast for GDP growth this year from 2.3% to 2.1%, but it is still growing, or is it? As most economists know, the economy is getting a little long in the tooth; we call it a “late cycle” market. One of the reasons you might want to cut...

Two puts support the markets

What a difference one quarter can make in the stock market. Here we are in mid-March and stocks are back to almost where they were at the beginning of October. The trends have been supporting the bull’s case and investors seem happy to buy stocks. Readers should realize by now that there are two “puts” supporting this market. A “put,” in financial jargon, is an option that protects you and your investments from catastrophic losses. That’s not to say you can expect no downside, but at some point, the put will come into play and support the markets. Back in 2008-2009, the Fed’s massive monetary stimulus program characterized by record low interest rates and massive purchases of bonds, was seen as such a put. Two years ago, the Fed began to remove that support by raising interest rates and selling some of those bonds they had purchased over the years. The markets did not take kindly to that exercise, nor did the president. After a near 20% decline in equity prices last quarter, the Fed did an about face and re-instated that put by once again easing monetary policy. As a result, the markets also did an about face starting the day after Christmas. Donald Trump represents the second put working in your favor. Although he has never publicly stated it, the president regards the stock market as his barometer on how well or poorly he is running the country. Polls, he believes, are suspect and should be ignored (unless they happen to be in his favor). He reasons it is much harder to manipulate the stock market than...

Pick your poison

Investors were greeted on Friday with two nasty surprises. Both occurred in February. Chinese exports dropped by 20.7%, while in the U.S., the nation added a dismal 20,000 jobs. As you might expect, the stock market did not take the news well. What really spooked traders was how far apart these numbers were to expectations. Over here, we were expecting 180,000 jobs to be added to the payroll number. In China, where the economy had been expected to weaken, exports had been forecasted to decline by 6%, versus the prior year. Before the ink had dried on the jobs data, the administration was already sending their point man on the economy, Larry Kudlow, the Director of the National Economic Council, on television to assure Wall Street that the February data was “fluky” and should be ignored. As for China, investors there took the Shanghai Composite down by 4.4% overnight. Japan dropped half of that (-2%), even after the government said its economy grew by 1.9% in the fourth quarter of last year. It also didn’t help that the European Central Bank lowered its forecasts yesterday for growth in the Eurozone and announced more stimulus measures to support the economy. Over the last two weeks, I have been warning readers to expect a pullback in the markets, nothing too serious, but maybe a 3-5% decline. If I were to take a guess, we could see the S&P 500 Index hit 2,700 or so, before we mellow-out. From there, it depends on how low those crazy algo- trading machines decide to take us. Where is John Connors when you need him?...

Stocks on hold

February delivered good gains for the markets. All the main averages were up, continuing January’s climb toward the old highs. This week, momentum stalled a bit, indicating that investors need more good news to continue buying. A China trade agreement (or lack thereof) still takes center stage. Despite the Washington, D.C. circus surrounding the testimony of Michael Cohen, the president’s chief “fixer” for over a decade, traders largely ignored the hype. At the same time (no accident in the scheduling), President Donald Trump hoped to take the spotlight off Cohen and back on him by meeting with Kim Il Jung in Hanoi for a second summit. Unfortunately, that meeting was such a bust that Trump left early without any progress at all. One wonders if the whole trip was just a publicity stunt to draw attention away from the Cohen testimony before Congress. Traders ignored that event as well. What really kept the lid on the market was U.S. Trade representative John Lighthizer’s comments before the House Ways and Means Committee on Wednesday. “Let me be clear,” Lighthizer said,“Much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached.” The trade rep went on to say that China needed to do more than just buy more of our trade goods, citing all the other concerns such as technology transfers and intellectual property theft. None of the above should be new to my readers, since it is something I have been talking about for months. However, this dose of reality flies in the face of all the hype...