China-related issues continued higher today

healthy cash flow trade spatLeslin_Liu / Pixabay

Commenting on today’s trading which was all about China-related issues, Gorilla Trades strategist Ken Berman said: 

While yesterday, it seemed that we might get a profit-taking dip in the aftermath of the trade deal with China, today’s broad rally crushed the hopes of shorts yet again. Small-caps, tech stocks, and cyclical issues led today’s rally, which is textbook bullish behavior, and as the Volatility Index (VIX) hit its year-to-date low too, the weakness of the past couple of days is already history.

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The major indices all closed at fresh all-time highs today, thanks to the upbeat economic releases, with the sector retaining its market-leading role following two weaker sessions. The Dow was up 267, or 0.9%, to 29,298, the Nasdaq gained 98, or 1.1%, to 9,357 while the S&P 500 rose by 18, or 0.8%, to 3,317. Advancing issues outnumbered decliners by an almost 4-to-1 ratio on the NYSE, where volume was well below average.  

Judging by the first few days of the earnings season, the pattern of the past few quarters might be repeating again. Analysts expected profits to drop by 2% on average in the fourth quarter of 2019, but, so far, the majority of firms handily beat expectations. Today, it was Morgan Stanley’s (MS) turn to blow away the consensus estimates both on its top and bottom lines. While the falling Treasury yields have been weighing, on the financial sector this year, this week’s positive reports could fuel another rally in the coming weeks.

Technicals are uber bullish

The first reactions to the details of the ‘phase one’ trade deal were lukewarm, at best yesterday, but today, the China-related issues continued higher together with the broader market. Industrials, which were very sensitive to trade-related headlines last year were among the strongest issues, thanks to the great Philly Fed Index, but Apple (AAPL) and Caterpillar also recovered from yesterday’s dip, despite their exposure to China. The doubts regarding the Asian giant’s promises could return in earnest later on this year, but for now, investors seem to be content with the results of the negotiations.

Although technicals continue to be wildly bullish, valuations look slightly stretched according to several analysts. Earnings have been stagnating for over a year now, and with that, the most used price-earnings multiples shot higher due to the recent breakout in stocks. That said, with the global economy finally showing signs of stability and the U.S. economy still marching higher, the earnings could be ready to start rising again. A deeper pullback could still be ahead this year, but the positive fundamentals mean that a correction would be just another buying opportunity in the ongoing bull market.

Following today’s blowout session in terms of domestic economic releases, we could be in for another treat tomorrow. The housing market, manufacturing, and the consumer sector will be in focus, with building permits, housing starts, industrial production, and the first reading of the Michigan consumer sentiment number coming out.

China-related issues best performers

The number of building permits was the highest in almost 13 years in December, and while analysts expect a slight drop on the forward-looking measure, the housing market still looks to be on fire. The JOLTS job opening estimate will come out as well, but as there is little doubt about the strength of the jobs market, the other measures will likely have bigger impacts.

Technical Corner.  The major indices continued their record-setting streak tonight, further solidifying the advancing trend in stocks, and extending the crucial long-term technical breakout that started back in November. The major indices remain well above their rising 200-day moving averages of 8,191 for the Nasdaq, 2,992 for the S&P 500, and 26,894 for the Dow, and the benchmarks are also clearly above their steeply rising 50-day moving averages of 3,172 for the S&P 500, 8,775 for the Nasdaq, and 28,203 for the Dow.

Small-caps, as measured by the Russell 2000 had a great session, as the index outperformed all of its large-cap peers. What’s even more important for bulls, the Russell surged past its December high, concluding a three-week-long consolidation period. The breakout could mean that the benchmark is finally ready to revisit its all-time high from 2018 after lagging behind the broader market for the better part of 2019. The index is also above both of its rising moving averages, despite the consolidation, so all looks set for a memorable rally. Stay tuned!

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