Stock Market Euphoria Firing On All Cylinders

Meltups and running stock markets are periods when equity prices rise rapidly and continuously without corrections. It’s a time when stocks can rise on negative news and technical indicators can remain overbought for an extended duration with falling volatility. Classic longer-term examples of this during our record decade-plus Bull market occurred in 2009, 2013 and 2017 when stocks appreciated to overly exuberant levels for over a year without a notable correction. The run higher over the past 3 months has also been relentless, sending our own preferred metrics to extremes we normally label a Sell. So far we have firmly resisted shifting from our Bullish outlook and have stated that we did not expect a short term top until at least mid-January when the China Trade Deal is signed and not until the SP had moved into the 3280’s. Investors can remain long term Bullish, while the risk of a normal correction greater than 5% will rise after the 15th as new highs are tested.

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With the SP 500 Index now testing the 3280’s and a momentous Trade Deal signing on January 15th, our ideal 3-month-old forecast is being achieved this week and some caution into early February is warranted. Trump’s masterful manipulation of market expectations stimulating a steady flow of buying rumors of a China trade deal has kept risk at bay since October. Buy the Rumor has worked well for investors and soon we may see if there is a Sell the News aspect to the old adage as the details of the trade deal surface and the earnings season begins. Should the SP surge past 3300 after the 15th we could see a minor overshoot in values to SP 3320 to 3340 or Dow 29,400 to 29,600.

(Click on image to enlarge)

(Click on image to enlarge)

While the signs of a notable short term top should manifest in January, we find one area of China-related euphoria in Agriculture (Ag) buying to be missing. We take the US trade negotiators at their word that China has enforceable guarantees to buy record amounts of raw and finished Ag products, mainly centered around Soybeans. It’s been surprising that commodities have yet to secure anticipatory speculation purchases to date. Perhaps it’s a warning of a negative surprise in the short term, however, once the Dollar breaks support at 96 and Soybeans and Hogs move to new highs for 2020, there could be renewed equity market buying on signs of improving the US and Chinese trade. While stocks are due for some corrective action by the end of January, once the transition to a lower Dollar and stronger commodities arrive it will signal further confirmation that a cyclical global economic rebound has begun with new buying in stock indices led by Emerging markets.

Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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