Market Report 4/25/16

Fed Week with the Market up at Resistance.

Everything hinges on the Fed language this week and the markets reaction to that.

There’s zero chance of a rate hike priced in – but the key will be the language. My guess is that they don’t raise but threaten to raise in June.

The financial media is making a big deal about the market up near the all-time high, but you could also look at it and say it’s gone no where for 14 months.

Here’s the weekly chart and notice the similarity between last week and the previous weekly candle I circled.

SPX_W_4242016

Basically last weeks low is a very important level. If for some reason the market breaks below that we could finally be looking at the ever-elusive pullback.

Like I said last week, there’s a ton of support below so I wouldn’t get all worked up if the market does pull back. Whether the inevitable pullback turns into anything more is an issue we’ll have to address later.

As I pointed out on the chart last week, the market has still been in the “huge rebound” phase and perhaps that can continue a bit more. But the inevitable pullback will arrive at some point just like the last two times I noted on last weeks chart.

A Fed week presents a perfect opportunity for a reversal. Now you know I’ve been saying for quite a while that the market’s stretched, the current run-up is getting long-in-the-tooth and I’ve been basically expecting it to run out of steam at some point. I thought it would be before now.

The key level at this point is 2100 for the over / under but more importantly – as I mentioned on the weekly chart above – last weeks low at 2073.

If we see a break below 2073 things could turn ugly quick.

The reason I say this is because I feel like everyone’s been lulled into a sense of complacency and the financial media is practically assuring us the “market” is going to hit an all-time high.

The real kicker here is that the stock market has become disconnected from the real economy. It’s disconnected from everything that normally matters and that’s a recipe for disaster.

I have shelves of trading and stock market books here and I happened to grab one off the shelf this week and open it up and the whole thing was literally about how “earnings and revenue growth are the main drivers of the market”. It was like an omen.

Because I know for a fact that earnings have been declining for some time now.

earnings-recession

And how about revenue growth?

revenue_growth_spx

I can barely keep track of all the companies that “missed” earnings or revenue estimates last week. These are big brand-name companies, Intel, IBM, Netflix, Microsoft, Google, Starbucks etc. All in all the earnings announcements that have been reported aren’t exactly signaling a robust and thriving economy. Here’s a decent round up of some of last weeks earnings.

I talked about all that macro stuff last week so there’s no need to rehash all of it. But the fact of the matter is that valuations are stretched given the fact that we are in a low-growth environment. The market is priced for perfection and it’s clear – based on earnings and revenue – that things just aren’t all that great.

Can the market continue to climb to new highs and beyond in an “earnings recession”? Count me as skeptical. I suppose the optimists are counting on “things to pick up in the second half” because that’s the standard narrative the guys on TV all trot out as a reason to buy stocks up here at nosebleed levels.

We’ll just have to see.

Last time the market was up at the highs was just after the earnings cycle peaked.

So I guess the two things I mentioned last week are the pillars under this market, the Fed and low interest rates and oil prices which held above 40 last week.

All I know is that things seem odd and disconnected and at some point a little reality might set in and then the narrative turns negative and we get that pullback. This past week we didn’t even get a dip. Every time the market looked like it was going to roll over it seemed like they stepped right up and bought it. Any little bit of weakness got bought.

That could change anytime and I guess a lot will depend on how the market reacts to the Fed language this week.

Regardless of all that macro stuff last week was actually a decent trading week and a lot of stocks acted well. There are still a lot of charts with constructive patterns and the sector rotation was alive and well.

We have two open swing trades and both look great going into the week so I’ll be happy to see a continuation of the recent action where stocks are acting a lot better than they probably should.

I did some work on the Help page over the weekend and posted several new videos. So check them out this week if you have time.

Other than that we’ll just take it as it comes this week and see how the Fed drama plays out and how the market reacts to it mid-week.

Join me for the live show Monday morning and we’ll take a look at everything and see what sectors are “winning the popularity contest”.

See you there!