S&P 500 - Massive 2019 Rally Continues

2019 has been a spectacular year for stocks as the S&P 500 is up 6.3%. If the stock market were to go up 6.3% every month it would be up 108% for the year. We know that’s almost impossible.

The goal is to highlight how great this month has been and that it won’t continue. S&P 500 is up 13.34% since the Christmas Eve low. Now it’s only down 9.08% from the September record high. Personally, I see no reason for the stock market to make new records in 2019. But the possibility needs to be considered since it is getting close to occurring.

S&P 500 was up 0.85% and VIX fell 7.78%. Yet the CNN fear and greed index was stuck at 58 which signals greed. The S&P 500’s 14-day RSI is 56.8 which is relatively normal.

It’s interesting to see how both these indexes aren’t picking up on this very overbought market. The Nasdaq and Russell 2000 outperformed the S&P 500 as they increased by 1.29% and 1.26%. It’s interesting to see how Intel’s decline of 5.47% didn’t impact the Nasdaq much.

Clearly, not many investors in Amazon and Microsoft see a reason to worry even though Western Digital and Intel talked about cloud weakness. Microsoft and Amazon are up 5.98% and 8.54% year to date.

Only the consumer staples and utilities sectors fell on Friday which makes it a perfect ‘risk on’ day. They fell 0.24% and 1.33%. The biggest winners were materials and technology as they were up 1.92% and 1.45%.

S&P 500 - Government Shutdown Ends Finally

Politicians’ most favorite thing is to kick the can down the road. It’s great for them because it delays tough decisions, while not having to deal with the ramifications of any decision and not making one.

The government shutdown ended on its 35th day. According to S&P, the shutdown cost the government $6 billion. Even though politicians had 35 days to negotiate, nothing was agreed upon. Therefore, the government will reopen only until February 15th unless a deal is made.

That’s very close to the March 1st deadline where America must make a trade deal with China. The political uncertainty will continue. At least the government workers will receive back pay and the workers on furlough will get back to work. After doubting my prediction that the shutdown would end by Friday, I ended up being correct. It was very tough to see how the politicians would act.

It’s always a good guess that they will delay all decisions. That’s why I continue to think the trade deal deadline will be moved back. The Chinese would like to see the deadline extended to the end of Trump’s presidency. They don’t want to give in to his demands that they respect America’s intellectual property.

A problem for China is that the Democrats probably won’t go easy on them either.

S&P 500 - D.R. Horton Misses EPS & Beats Revenue Estimates

It’s important to follow how home-builder stocks are doing. Personally, I expect the housing market to start recovering in 2019.

D.R. Horton reported a usual quarter in that it missed EPS and beat revenue estimates. Most firms beat EPS estimates, but only a little more than half beat on sales. D.R. Horton had $3.52 billion in revenues which beat estimates for $3.44 billion. It had 76 cents in EPS which missed estimates by 2 cents. Their stock fell 2.61% after this report.

The Chairman stated he sees some "moderation of demand for homes, particularly at higher price points." It’s possible some people in the upper class lost interest in buying homes because of the decline in the stock market in Q4.

The firm stated it continues to see good demand and a limited supply of homes at affordable prices across its markets. This point is important. Weakness in sales is partially driven by the lack of supply at the low end of the market.

S&P 500 - Treasuries Selloff As Fed Meeting Approaches

2-year yield and the 10-year yield increased 4 basis points. Higher long bond yields mean inflation and growth are coming. I’m excited to see all the economic reports from November and December that were delayed by the shutdown.

It’s possible the economy is improving even though earnings estimates have been cratering.

The 2-year yield increasing means the odds of rate hikes are increasing. That is true according to the CME Fed watch tool. There is currently only a 4.8% chance the Fed will cut rates in 2019. There is a 66.7% chance the Fed will do nothing. There is a 28.5% chance the Fed will hike rates at least once.

Everything has shifted in the hawkish direction. However, there is still only a 3.4% chance the Fed follows through on its guidance for 2 hikes.

Next week will be by far the biggest week of the year because Apple, Amazon, Microsoft, and Facebook are all reporting earnings and there will be a Fed meeting.

S&P 500 - There will be 124 S&P 500 firms reporting results next week.

Since there is no chance the Fed will raise rates on Wednesday, the guidance will be the main focus. I think the Fed will try its best to strike a neutral tone because the stock market has recovered, but it’s not clear if the economy has. No matter how hard the Fed tries to be neutral, I expect analysts to claim it was dovish or hawkish.

S&P 500 - Conclusion

Even though neither the 14-day RSI nor the CNN fear and greed index say the market is overbought, I think it is. The stock market is on pace to increase over 100% this year.

The market could make new highs in a few weeks if it keeps rallying this quickly even though earnings estimates are plummeting. We will get the truth on earnings season next week as 124 firms will report results.

Fed likely won’t hike rates on Wednesday. I don’t expect a change to guidance because the economy is trailing the stock market’s blazing recovery.