Stocks End Week Higher As Investors Await Earnings Season:
Stocks rallied for the third straight week as investors wait for earnings season to begin. Over that time, the major indices went from beginning extremely oversold to being over bought. That, in and of itself, is not the end of the world but it is important to note that the market rallied into resistance (declining 50 DMA line) and the bulls now want to see the market break above resistance. Meanwhile, the bears want to see the market roll over and fail. So far, several big companies have lowered earnings guidance and have warned about lousy sales last quarter. In bull markets there is an adage which says buy the rumor and sell the news. In bear markets, you do the opposite: Sell the rumor and buy the news. There is a good chance the market sold off in the fourth quarter on the rumor that earnings would be lousy, only to rally now once earnings are announced (news). Now, if that doesn’t happen and the market rolls over and fails from here then this will be another classic case of a bear market rally that fails near resistance. Conversely, if the bulls manage to send the major indices above their declining 50 DMA line that will be a net positive as we head into earnings season.
Stocks ended a choppy session in the black on Monday as investors digested Friday’s very strong rally and waited for the latest U.S.-China trade developments to unfold. On Friday, the major indexes all surged over 3% after Federal Reserve Chair Jerome Powell did a 180 and said the central bank would be “flexible” in its approach to monetary policy. That basically means the Fed is more than happy to shift back to an easy money stance. Stocks rallied on Tuesday as investors remained cautiously optimistic that a trade deal will get done between the US and China and Tim Cook told CNBC that Apple’s ecosystem has never been better. At 8:16am, President Trump tweeted, “Talks with China are going very well!” which set the tone for a positive day on Wall Street. President Trump addressed the nation Tuesday night and made his case on why Congress should fund the Wall. On Wednesday, stocks rallied as investors hoped for a deal to get done between the U.S. and China.
Thursday & Friday Action:
Stocks opened lower but closed higher on Thursday after Macy’s slashed guidance. Several other retailers fell on the news. In other news, Federal Reserve Chairman Jay Powell said he is ‘very worried’ about the growing amount of U.S. debt and said that Apple’s iPhone sales warning bodes poorly for China’s economy. Meanwhile, President Trump canceled his trip to Davos amid the standoff over the government shutdown. Stocks were quiet on Friday as concern spread regarding the government shutdown and the ongoing slowdown in China.
Market Outlook: Oversold Bounce
The bulls are doing their best to rescue the market from falling any further. The market was extremely oversold and is currently bouncing to help work off that oversold condition. Resistance is the 50 and then the 200 DMA lines for the major indices. After that the big level of resistance to watch is 2018’s high. Meanwhile, support is December 2018’s low. As always, keep your losses small and never argue with the tape.