foxex: Trump’s Bullish Tweet

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Tuesday, January 08, 2019

1. Trump tweet sparks rally

2. S&P 500's "W" reversal

3. The pendulum swings on junk bonds

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Major Moves

Traders never know whether the next tweet from President Trump is going to spark a rally on Wall Street or send portfolio managers running for cover. Today, the tweet was a bullish one.

This morning, President Trump tweeted "Talks with China are going very well!" and the market responded positively. With so much uncertainty in the global economy, it seems any good news coming out of the trade talks with China is being welcomed with open arms by traders these days.

The S&P 500 closed 0.97% higher at 2,574.41, the Dow Jones Industrial Average closed 1.09% higher at 23,787.5 and the Russell 2000 climbed a full 1.51% higher to close at 1,426.55. The continued rally in small-cap stocks confirms trader sentiment is shifting to a more positive outlook.

Tech stocks and transportation stocks – which have both been sensitive to the ebbs and flows of Chinese trade talks – helped lift the major indexes even as Financial stocks were falling.

The big banks, like Bank of America (BAC) and JPMorgan Chase (JPM), seem to have shot themselves in the foot today by releasing reports indicating they believe bond yields have reached their near-term peaks and are likely to remain low for some time. This caused some selling in the Financial sector as lower yields tend to be a drag on bank revenues.

Rising crude oil prices also helped lift stocks in the Energy sector, like independent oil and gas firms ConocoPhillips (COP) and EOG Resources (EOG).

Just in case you needed one more signal that analysts are still optimistic about the market, JPMorgan analyst Doug Anmuth reiterated his Overweight rating on Facebook (FB) and called the stock one of 2019's "best ideas."

S&P 500

In response to the shotgun of bullish news, the S&P 500 enjoyed its third straight day of gains.

From a technical perspective, the S&P 500 is providing a number a bullish confirmation signals.

After riding the lower Bollinger band® down, the index has peeled away from the lower band and crossed above the moving average that runs between the two bands. This indicates the index has lost bearish momentum. It's too early to tell whether it is going to generate and maintain a significant amount of bullish momentum, but the downtrend always has to slow down and stop before the uptrend can begin.

The S&P 500 has also formed a solid "W" shaped reversal during the past few weeks. The support level connecting the two recent lows slants upward, but the shape of the bullish reversal still holds.

The index still faces potential resistance at 2,630, but the it is building a solid foundation from which to challenge this level.

Read more:

What is a Double Bottom?

Introduction to Technical Analysis Price Patterns
The Basics Of Bollinger Bands®

Source: finviz.com

Risk Indicators

Many of the assets that were hit the hardest during the December drop are bouncing back with a vengeance. The pendulum seems to have swung too far toward the bearish end of the spectrum and is now aggressively correcting to the bullish end.

One asset class that has soared higher during the past three days is junk bonds. Junk bonds, also known as high-yield bonds, are bonds that have a credit rating of BB or below from Standard & Poor's – meaning they have a higher default risk than investment grade bonds.

When traders are nervous about the future, they tend to scale back on riskier assets, like junk bonds, in their portfolios. Conversely, when traders are excited about the future, they tend to load up on riskier assets.

In late-December, traders couldn't dump junk bonds fast enough. You can see in the daily chart of the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) below just how rapidly the value of the fund fell.

Now that traders aren't so gloomy, JNK has not only recovered all the ground it lost but also broken above a long-term down-trending resistance level on its way to its highest close since December 3.

Seeing this recovery in a risky asset like JNK tells us traders are confident enough about the next few months to put their money into more than just defensive stocks and conservative bonds.

Read more:

What is a Junk Bond?

What is Default Risk?

Understanding Credit Ratings

Bottom line: Green Shoots

Analysts often talk about looking for "green shoots" as the first sign of a bullish springtime in the market after the frigid winter of a bearish retreat. I am seeing multiple green shoots right now and am cautiously optimistic the full thaw may be coming.