The S&P 500 Is Close To Breaking Out Of Its Recent Downtrend

Stocks Rally Slightly On Wednesday

This week has been great for equities as they rallied Wednesday again. It was a much smaller rally than the prior two days as the S&P 500 was up 0.08%. The chart below is my basic technical analysis which shows that the market has been making lower highs. The S&P 500 is right at the trendline. If it can increase in the next few days and possibly beat the previous high, it will be bullish. Failing at this point would be a red flag. The Dow Jones was actually down 0.16% because IBM stock fell 7.5%. IBM has a share price of $148.79 making it the 9th highest price in the Dow out of 30 stocks. The Dow is price weighted so high priced stocks have a higher weighting.

Once again, the financials underperformed as they fell 0.37%. The XLF is only up 1.55% since the February low which is worse than the S&P 500 which is up 4.86%. Energy led the way as it increased 1.55% as oil was up 3.35% to $68.75 since stockpiles dropped. The higher oil gets, the higher inflation gets which could become a thorn in the side of the Fed. Personally, I’m bearish on oil because the economy is slowing and there is so much shale production that will come on line if oil gets above $70 and stays there.

Trading on Wednesday was an example of earnings holding up the market rather than causing it to rally. The industrials sector was up 1.02% on the back of great earnings from CSX. The stock was up 7.85% as the firm reported 78 cents of EPS which beat estimates by 12 cents. Revenue growth was 0.3%, reaching $2.88 billion which beat estimates by $50 million. The bad news for the overall economy is that this beat was driven by operational improvements as the operating ratio improved 950 basis points to 63.7% from 73.2%.

Great Earnings From American Express & Amazon Letter

It looks like stocks will head higher on Thursday because American Express beat estimates and Jeff Bezos released his shareholder letter for Amazon. American Express had $1.86 in EPS which beat estimates for $1.71. The firm also said EPS for the full year will be on the high end of the range from $6.90 to $7.30. Revenue of $9.72 billion beat estimates for $9.46 billion. The stock rallied 3.99% after hours on Wednesday. This is a great sign for the overall economy just like CSX’s report. This one is even better because revenue was great opposed to the executional improvements CSX had.

Amazon stock was up 1.71% after Jeff Bezos mentioned in his shareholder letter that there are 100 million Amazon Prime subscribers. Amazon added the most Prime members in 2017 than any prior year which isn’t surprising. The service is a good deal for consumers and it’s also great for Amazon because Prime members spend more money on the website that regular customers. The firm shipped 5 billion products through Amazon Prime. Amazon has sold tens of millions of Echo devices as well. These smart speakers can further boost purchases of Amazon devices and third party products on the website.

The firm stated it is doing the technical work to bring Prime benefits to grocery shoppers. This could make Amazon into a retail club like Costco if the firm decides to make purchasing a subscription mandatory for shoppers. The other announcement Amazon made was it is partnering with Best Buy. Best Buy will be launching 10 4K and HD Fire TV models from Toshiba and Insignia which will be sold only in its stores. Best Buy will also become a 3rd party seller on Amazon for the first time. Best Buy has had a remarkable turnaround in the past few years as its stock has rallied 161% since January 22nd, 2016.

Fed Beige Book Is Released

The Fed’s Beige Book, where it measures the latest economic reports, was released Wednesday. The Fed stated, "Labor markets across the country remained tight, restraining job gains in some regions...Upward wage pressures persisted but generally did not escalate; most districts reported wage growth as only modest." This is a reasonable assessment of the labor market as it becomes closer to reaching full employment. The day the Fed announces the labor market is at full employment, it will be time to sell because the Fed will be hawkish. The Fed is already set to invert the curve even though it makes claims to the contrary.

The Fed also said there was robust business borrowing and rising consumer spending. This information is far off. Clearly, the Fed has missed the past few months of slowing loan growth and the retail sales reports this year which led the Atlanta Fed to expect only 0.9% growth in real consumption expenditures in Q1. The Fed might be shocked by the relatively low GDP growth which will be reported later this month.

Junk Bonds Rally

The junk bond market is extremely optimistic even though stocks are still in correction mode. As you can see from the chart below, the Bank of America high yield master II option adjusted spread is only 6 basis points higher than the trough in the index in January. This is a 53 basis point decline from the peak this year. It’s encouraging to see the junk bond market rally as it likely means the stock market is near the end of its correction.


In the near term, I like stocks because earnings season looks good and the junk bond market is signaling the coast is clear. It seems like the S&P 500 and the Nasdaq will be pushed higher by Amazon in the next few weeks as the firm has 100 million Prime subscribers and will probably report great earnings. A recession might occur in the next 1-2 years, but for now I’m bullish as I think stocks can increase 5% over the next 1-2 months.

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