Tuesday, April 25, 2017

Are Planets Aligned For A Renewed Stock Market Rally?

But specter of government shutdown could cast cloud over bullish outlook.


By Sue Chang
MarketWatch
April 25, 2017

Every once in a while, stock market bulls catch a break where technicals, fundamentals and market psychology all fall into line. This week may be one of those rare times when the planets are aligned, analysts said.

For the technically-minded, Frank Cappelleri, executive director at Instinet LLC, may have the most encouraging chart of the day.

As he illustrates below, the S&P 500 SPX, +1.08% has been treading water since touching a record high of 2,395.96 on March 1.

“The S&P 500 had been confined to the trading channel since topping out in early March. Each decline found support near the lower line, and each advance ran into resistance at the upper line,” said Cappelleri.

“Today, the S&P 500 broke out of this technical pattern,” he said, and is now headed for a test of 2,400.



On Monday, the large-cap index had its best day since March 1 as investors welcomed the French election results.

The S&P 500 went through a rough patch in recent weeks with the index closing below its 50-day moving average on April 12 for the first time since November. That tends to signal near term weakness and the market subsequently fell 1.1% that week. But as far as red flags go, this one bodes well for the market as stocks tend to rally in the months following the breach.

The S&P has posted an average gain of 4.75% in the three months after it fell below the 50-day moving average, according to Bespoke Investment Group.



Seasonality may also supportive, at least in the short term. Historically, April tends to be a good time to buy stocks with the S&P 500 posting an average return of 2% in the month over the past 20 years, according to Ryan Detrick, senior market strategist at LPL Financial.


This year, the index’s performance month to date does not quite measure up but as Detrick noted, most of the gains have come in the second half of the month.

“As of April 14, the S&P 500 has been up only 0.2% on average, yet has finished up 2% by month end. In other words, the slow start to April in 2017 is perfectly normal, and history would suggest a bounce over the second half of the month is potentially still in play,” he said in a blog post earlier this month.

Fundamentally, the market is in a good place too, bulls say.

The U.S. economy remains on track for steady, if not spectacular, growth this year while corporate earnings are surprising on the upside.

As of Friday, with 30% of S&P 500 components having reported first-quarter results, earnings have come in 1% above estimates, the highest in five year, thanks to financial companies leading the charge, according to Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch.



Subramanian projected first-quarter earnings to grow more than 10% year-over-year and sales to rise more than 7% year-over-year.

“Managements’ positive tone on earnings calls has continued from fourth quarter into first quarter, with optimism still at record levels and mentions of the word ‘better’ relative to ‘worse’ or ‘weaker’ still at levels last seen in late 2010,” she said in a report.

The mood in the market is also much more confident this week, which analysts credit to the strong showing by centrist Emmanuel Macron in the French election. Macron will face National Front leader Marine Le Pen, a favorite of the far right, in the runoff on May 7.

There were fears going into the election over the weekend of a worst-case scenario where two euroskeptics—Le Pen and far-left candidate Jean Luc Melenchon—could emerge as forerunners to contest the presidency.

Barring any last minute upset, the polls indicate that Macron will prevail over Le Pen, which would ensure that France won’t abandon the eurozone.

Back in the U.S., there is anticipation building over President Donald Trump’s tax plan, which he promised to unveil Wednesday, just ahead of his 100th day in office. Trump has ordered White House aides to accelerate efforts to draft a tax plan that would slash the corporate rate to 15%, The Wall Street Journal reported Monday.

If Trump’s plan gains traction, it could help reinvigorate the rally that initially followed his November election victory but faded earlier this year after a White House-backed effort to repeal and replace Obamacare stalled in the House.

But for all the bullish signals, this market isn’t without risks.

If the president’s tax cuts don’t live up to expectations or he fails to secure legislative support for the plan, investors’ big hope could just as easily turn into a headache. There is also the possibility of a government shutdown this weekend if politicians are unable to reach a deal on a spending bill.

And just as for the positive thesis, one cannot ignore seasonality for the negative scenario as it will soon be that time of the year when investors like to dump stocks and check out for the summer.

“The market typically does better in November through April than in the worst six months from May through October,” Sam Stovall, chief investment strategist at CFRA, said in a Monday note.

Since April 1945, the S&P 500 has risen an average of 6.7% from November to April but added only 1.6% from May to October. Interestingly enough, the “sell in May and go away” appears to be a universal phenomenon with similar strength and weakness cycles apparent in international stock markets, he said.

Stovall, however, doesn’t advocate going to cash.

“History says investors would be better off rotating, than retreating. History shows that investing in cyclical sectors from November through April, and then gravitating toward defensive groups from May through October, has made the experience both thrilling and rewarding,” he said.


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