Key Events
After three of the four major US indices opened lower yesterday, all four—the S&P 500, Dow, NASDAQ Composite and Russell 2000—posted double records, on both an intraday and closing basis, after parties on both sides of the Congressional aisle reached an interim funding agreement, allowing government offices and services to reopen, at least until February 8.
Regardless of how the current earnings season plays out, this deadline will likely become the next big focus for investors, egging them to buy stocks now, in a race until the next potential shutdown date. Absent any other obvious catalyst, yesterday’s exceptional bullishness is a symptom of that psychology.
Of course, it helps if investor predisposition is to be bullish in the first place. The S&P 500 Index completed three straight weeks of gains to cap the best start to the year since 1987.
The stated fundamental cause is upward earnings revisions, leading to a river of money flow into stocks. The sentimental cause is optimism that President Donald Trump is the catalyst for this raging bull market and will continue to be so. About 66 percent of Americans are of the opinion that stocks will continue to climb.
That's an all-time high for this particular measure. What's interesting—and alarming—is that the animal spirits released by Trump’s election keep carrying equity prices higher. The exuberant sentiment is shared by both institutions and retail traders. Historically, the majority tend to be wrong, which means that when most are bullish about the market, it signals a top. The fact that institutions and retail traders are on the same side may be a sign that institutions have stopped thinking like smart money.
Global Financial Affairs
The S&P 500 Index gained 0.81 percent yesterday after opening 0.05 lower. It closed 0.04 points below the 2833.03 high of the day, a bullish statement. This was its 11th record for the new year.
The Dow Jones Industrial Average rose 0.56 percent after opening 0.18 percent lower. It closed 0.43 points higher, signaling that traders were comfortable with the position, even during the still-in-effect government shutdown. This was its 8th record for 2018.
The NASDAQ Composite opened 1.68 points higher and extended its advance to 72.03 points, or 0.98 percent. It is its 11th record for the year.
The Russell 2000 matched the Dow’s 0.56 percent advance. After opening 1.45 points lower, or down 0.09 percent, the small-cap index closed at the very top price of the day, 1605.36. This is its 9th record for the year.
Index Activity Summary:
- The NASDAQ Composite advanced the most, while the Dow and Russell each gained the least.
- The S&P 500 and NASDAQ have the highest number of records, while the Dow Jones has the least.
- The NASDAQ Composite had the strongest open, with a rising gap; the Russell the strongest close, at the very highest price of the session.
Of the S&P 500's 10 sectors, only Materials was in the red and even then with only a 0.22 percent decline. Energy led the index's gainers with a 2.2 percent advance, double that of the runner-up Consumer Discretionary with a 1.11 percent gain.
Energy’s leap higher followed a 0.78 percent jump in the price of crude oil, after a two day decline for the commodity, its biggest advance since January 9. Technically, the sector-tracking Energy Select Sector SPDR ETF (NYSE:XLE) closed at $78.03, a mere 3 cents from its highest price of the day, another bullish indicator.
It's the highest close for the ETF since May 5, 2015. However, it stopped short by the resistance of the former, December 12, 2016 peak of $78.45. An upside breakout would signal another leg in the uptrend since mid-January 2016, while a close beneath $76 may suggest a double top. Considering that the price is trading within a macro rising channel since 2008, the bias is to the upside.
Reaffirmation by OPEC and Russia that they’ll maintain cuts until the end of the year, to balance the market, helped move crude itself higher. They even signaled their readiness to cooperate afterward. Oil climbed toward $64 on forecasts for a record run of declines in US crude stockpiles.
Technically, from January 9 to 15, the price of West Texas Intermediary crude oil climbed for six straight days. Today is the 6th day of consolidation since that rally. The climb produced a flag pole, and the consolidation is the flag's body. The psychology driving trading within this pattern is strong bullish sentiment, spurring a sharp move, followed by profit-taking and soul searching about the next move. An upside breakout signals the prior trend is resuming, while the length of the pole implies the length of the next move.
Stocks in Asia advanced to record highs this morning, both on temporary relief that the US government shutdown had ended, even if only for a short while, as well as a positive corporate earnings outlook from the US. Last night, after the bell, Netflix (NASDAQ:NFLX) reported its biggest quarter ever. The stock catapulted higher on the news, gaining 3.23% in regular trading, moving even higher, up 8.88% in after market trading.
The change in the company's share price moved its market cap into mega territory, whereupon the internet entertainment company joined the $100 billion valuation club. Netflix beat estimates for number of subscribers, while earnings met expectations, but guidance beat. The stock gained $7.12, to close at $227.58. The price jumped in after-hours trade as well, gaining an additional $20.01, which pushed the price to $247.59 at time of writing.
Contrary to President Donald Trump’s stated pro-business agenda, his protectionist instincts appear to have moved to the forefront; yesterday he imposed stiff tariffs on imported solar panels and washing machines. LG Electronics (KS:066570) was among this morning's underperformers as a result.
Nevertheless, optimism generally prevailed. The MSCI Asia Pacific Index headed for a fresh record and the MSCI Emerging Markets Index saw a seventh straight day of gains, its longest winning streak in six months, after Goldman Sachs and the Blackstone Group were the latest financial institutions to come out bullish on developing nations.
In Europe today, the bulls kept charging. The STOXX Europe 600 Index jumped 0.3 percent at the open; it's been fluctuating around that level since.
Germany’s DAX gapped up 0.9 percent, reaching a record high. France’s CAC Index Index up-gapped too, by 0.43 percent, reaching its highest point since December 2007 but pared back gain to a more modest 0.1 percent.
Technically, the CAC completed a bullish flag with an upside breakout and the retreat I considered a return move.
While Japan's yen is today's biggest FX story, the US dollar is bouncing from a range bottom since January 15, potentially a bearish flag.
After the yen rose on more positive language on inflation expectations by the BoJ in today’s policy statement, central bank Governor Haruhiko Kuroda disillusioned yen bulls who were hopeful of seeing the light at the end of the monetary stimulus tunnel. Policy makers voted 8-1 to keep interest rates and asset purchases at current levels.
Nevertheless, yen bulls prevailed; the currency climbed 0.36 percent versus the dollar. Time and again, we see central bankers express hawkish rhetoric, only to turn around and dampen speculation. Time and again as well, traders have ignored attempts to dampen their bullishness. This has been especially true for the ECB.
UBS Chairman Axel Weber said the bank makes a clear distinction between institutional and retail clients when it comes to Bitcoin, noting that “this is not an investment we would advise.”
Bitcoin dropped 12 percent today after South Korea announced taxation of cryptocurrency exchanges. Technically, Bitcoin is sliding for a third straight day, struggling to remain above the $10,000 key level. The cryptocurrency is set for its lowest close since November 30 and the lowest point since entering a downtrend, after completing the falling peak-trough sequence on January 17.
Up Ahead
- Barring any last-minute changes in Washington, President Donald Trump will join world leaders and senior executives in Davos, Switzerland, for the annual World Economic Forum.
- The European Central Bank announces its next rate decision on Thursday January 25.
- The U.K. House of Lords is considering Prime Minister Theresa May’s Brexit bill this week.
Market Moves
Stocks
- Japan’s TOPIX climbed 1 percent, heading for its highest close in more than 26 years.
- Hong Kong’s Hang Seng rose 1.3 percent, also heading for the highest level on record with its sixth straight advance.
- Australia’s S&P/ASX 200 Index jumped 0.8 percent, the largest climb in 11 weeks.
- The Stoxx Europe 600 Index increased 0.3 percent as of 8:34 London time (5:34 EDT), headed for the highest close in more than two years.
- The MSCI All-Country World Index climbed 0.2 percent while the MSCI Asia Pacific Index increased 0.9 percent, both heading toward record closes.
- Earlier this morning, S&P 500 Futures rose 0.1 percent to the highest on record; as of this writing they're headed lower, currently down 0.19%
Currencies
- The Dollar Index gained 0.1 percent to 90.47. A close at this level may confirm yesterday’s bullish inverted hammer.
- The euro dipped 0.3 percent to $1.2227.
- The British pound dipped 0.3 percent to $1.3949, the largest slip in almost three weeks.
Bonds
- The yield on 10-year Treasuries sank three basis points to 2.62 percent, the biggest tumble in almost four weeks.
- Germany’s 10-year yield declined two basis points to 0.55 percent, the lowest in almost two weeks on the largest fall in a week.
Commodities
- Brent crude climbed 0.3 percent to $69.22 a barrel.
- West Texas Intermediate crude increased 0.4 percent to $63.82 a barrel.
- Gold rose 0.2 percent to $1,336.66 an ounce, the highest in a week.