The structure of the market has significantly improved in the last 3 weeks, particularly because of large macro factors.
Like…
Another Fed rate cut, an upcoming resolution of the trade war, market largely displaying the impeachment proceedings to be unimportant, and strong earnings.
For me, I’ve been very cautious going into this earnings season, because the high momentum stocks have been beaten down. But, with a positive earnings season in addition to the Fed and trade war turning out so positively, I really think it opens up the door to the market going out on the highs at the end of the year.
The trade war and Fed have weighed down the market heavily, but, without those issues — I don’t see any reason why we can’t make $3130 in the S&P, and $8500 in the Nasdaq. Even the lagging index, the Dow, was able to make a new high today.
One of the most critical factors here…?
The strength of this earnings season.
I noted going into this season, that we were at a critical juncture for companies. We entered the season with dashed hopes and lost momentum — and it would be earnings that could make or break the current sideways to down price action.
We never ‘know’ what earnings will bring, but we knew what to look for.
Now that we’re through the thick of the season, we have an answer. Earnings have been better than expected, with the majority of companies beating and even noting positive guidance in the future.
This quarter has proved that the market and economy is strong, and while there are a couple data points suggesting a loss of steam, the overwhelming sentiment is strength.
At this point, we can attribute the momentum stocks losing steam, more to loss to investor confidence rather than something that’s actually wrong fundamentally with the stock market or companies.
For investors, this is great news. It’s also great news for traders.
Our nice bull run should last a bit longer. Of course, it also depends which one of these you are. Perhaps, you’re both (like me!).
This is where you have to decide… are you a short term investor, and are trading momentum (that is a lot of what I do) OR are you a long term investor who’s sticking the course, despite the ebbs and flows?
In the long term game, we’re strong and will continue strong as long as earnings remains positive (like it is) and the trade war gets closer to a resolution versus a breakdown.
On the short term, the market’s extended and overbought, and a pullback to the mean is very likely. This is a spot where I like to have a good hedge on.
Interested in learning more about hedges?
Check out my free webinar tonight with Sean Fenny from the Nasdaq. We’ll be discussing how, when, and why to hedge. See you at 7pm tonight! Grab your spot here.
