All the data reported this week broke in favor of the bulls: strong earnings from Apple, the Federal Reserve remains committed to 2-3 (not four) rate hikes this year, and job creation was steady without rising wage pressures. Overall earnings, guidance and dividend data were also excellent. Lastly, the Mnuchin Mission to China produced soothing statements suggesting more talks but no immediate crisis. Other than stormy clouds over the nation's capital, the bulls should be empowered to seize the initiative.
Chart 1: The all-important Apple stock, with its very large weight in major indexes, rallied towards new highs after thumbing its nose at overly pessimistic analysts with a strong earnings report.
Apple Thumbs Its Nose At Analysts
The analyst community were massively wrong on Apple's sales and earnings, and their pessimism had driven the stock lower, dragging the market down with it. The strong recovery by Apple stock (see Chart 1) should be real inspiration for bulls.
Expect 2-3 (not 4) Fed Rate Hikes This Year
Traders were crawling onto their ledges fretting about four rate hikes this year. The Fed talked of symmetric targets i.e., not reacting more aggressively even if inflation was a bit higher than their 2 percent target in the months ahead. The Treasury yields have backed off their recent highs this week in response. Hence, the stay-the-course Fed will stick with 2-or-3 hikes this year.
Chart 2: The US Treasury 10-year note has backed off from just above 3-percent, and the reaction across of the entire yield curve should allay concerns of an inactive or reactive Fed.
Will China or Other Tariffs Disrupt Corporate Earnings this Year?
Goldman Sachs suggests that tariffs on China would decrease US GDP by less than 0.1% percent. Factset analyzed earnings calls in the first quarter and found that though more companies spoke about tariffs, a majority said it had no impact on earnings this quarter, and do not expect any impact in the next quarter. Overall, US GDP is on track to rise 2.8%-3% this year and about the same next year, and S&P 500 earnings are expected to rise more than 15% this year. The Factset bottom-up forecast for the next twelve months for the S&P 500 is at 3070, up double digits (see page 11 'Targets and Ratings' paragraph here.)
Investor Sentiment is Neutral-to-Weak
The CNN Money sentiment fear-and-greed index is at 39, which is weak, but off its lows for the year. The AAII investor sentiment survey for the week ending 5/2/2018 reports 28.4% Bulls, almost 10% points below average, though Bears are at 30.2%, almost exactly at the long-term average. Thus, Bulls seem overly pessimistic. Investor sentiment is considered a contrarian indicator, so one can argue that weak bullish sentiment is a good thing for a rally.
Washington has changed from "No drama Obama" to "High drama Nobama" so headline risks remain, especially as the city switches into election mode. But traders will just have to adjust to it as just another variable.
The double-bottom continues to hold, but the market has to punch through tough overhead resistance and comfortably hold 25,000 on the Dow before Bulls can push the market even higher. The CTM made a brief foray into the oversold region, which should make the rebound a bit easier.
Chart 3: The Chande Trend Meter finally poked below 20, which should make the rebound easier. However, until we can get beyond and hold 25,000, the choppy trading phase will remain in force.
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