foxex: Melting Up

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Stocks Rise as U.S. Govt. Averts a Shutdown

Markets Close

Dow
25,425.76 +1.49%

S&P
2,744.73 +1.29%

Nasdaq
7,414.62 +1.46%

VIX
15.43 -3.38%

INV Anxiety Index
102.17 Neutral

US 10-Yr Yield
2.684 +0.86%

Stocks Soar on Shutdown Aversion

With the prospect of a government shutdown averted and subtle signs of progress in the U.S. China trade talks, investors went on a buying spree today. The DJIA popped 1.49%, and nearly every one of the Dow components traded higher. From tractor makers to chemical manufacturers, chipmakers to financial institutions, it was hard to find a patch of red in the vast sea of green. That happens sometimes.

As we know, the general trend for stocks has been very positive since the meltdown of Christmas Eve. As of Monday's close, here's a snapshot of the performance of the major indexes:

S&P 500 Index (SPX): +15.5%
Dow Jones Industrial Average (DJIA): +15.4%
Nasdaq Composite Index (IXIC): +18.1%
Nasdaq 100 Index (NDX): +17.2%
Russell 2000 Index (RUT): +19.9%

(James has more on the S&P 500 on the verge of crossing a critical technical threshold, in our Chart of the Day, below)

Why it Matters

The on again, off again trade talks have had something to do with this, but the main source of the improving sentiment is the Federal Reserve's dovish pivot away from further interest rate increases in 2019...for now. That has some market experts worrying about a 'melt up', for stocks.

Melting up refers to the dynamic when securities, like stocks, rise for reasons not tied to their fundamentals, but due to economic or policy conditions. In this case, the Fed's decision to keep interest rates where they are for the time being removes the specter of higher borrowing costs that threaten margins and profitability.

We covered it in more detail here:

Why Stocks may see a 'Melting Up', like the late 1990's

The thing about 'melt-ups', is that eventually, they lead to 'melt downs'. The timing of the melt downs is very difficult to predict, which makes stock picking so darn hard.

For long-term investors, this is just another part of the cycle. You should be investing in accordance with your goals and risk tolerance, which means you should not be chasing stocks or ETFs in an attempt to time the market and know when to get in and when to get out. Set your portfolio to ride the ups and downs given your time horizon and goals, and let it be. If the uncertainty is torturing you, stocks might not be the right place for you and your money.

Investors vs. Everyone Else

Apparently, many investors are fed up with stocks. It's hard to blame them given the violence of the market correction last fall. In Bank of America Merrill Lynch's recent survey of fund managers, the rotation of money out of stocks and into cash is at its highest level in a decade. Check out this chart.

Market volatility, warnings of a coming recession and the uncertainty around Brexit and the trade wars is compounding that rotation, but it is very real. It means there is a lot of investable money on the sidelines, but it also means that many investors have simply checked out of the market, reducing the amount of participants in it. Those investors who sold in a panic at the end of 2018 have missed a rebound, to say the least - which is why we say that it is impossible to time the market.

Meanwhile, in the U.S., at least, people are feeling as confident as they have in a long time about their finances. According to a recent Gallup poll,

69% expect their financial situation to improve over the next year
Optimism about finances over the next year is almost at a record-high level
50% say they are in better shape financially than a year ago

To be sure, the poll does reflect some political partisanship. Democrats who responded felt less confident than Republicans. But the overall level of confidence is high in America, given historical standards. Low unemployment has certainly been a factor, but the overall level of confidence is surprising given the political climate in this country, the recent shutdown and the uncertainty around trade.

Here is Gallup's chart, for reference.

We know a lot of our readers are not in the U.S., so we thank you for bearing with us as we focus on investors and consumers in this country for today. We'll be more global going forward.

That said, it is very important to remember that the stock market and the economy are two different organisms. Only half of Americans are invested in the stock market, either actively or passively through their 401k or IRA plans. Financial confidence does not necessarily stem from the performance of the stock market, although it can have a psychological effect.

Why else do you think the evening news shows the stock market close every day?

Chart of the Day: S&P 500 on the Verge of Breakout

Stocks rallied across the board on Tuesday as investors gained more confidence that another U.S. government shutdown can likely be averted and U.S.-China trade negotiations may actually have a positive outcome after all. Congressional leaders settled upon a tentative deal late on Monday to avoid another shutdown that would otherwise happen on Friday. Though President Trump said on Tuesday that he is "not happy" with the deal, he added that he doesn't think that there will be another shutdown. Investors were also gaining confidence that U.S. trade negotiators, who are currently in China, will be able to hammer out a deal by the early March deadline when the 90-day window of negotiations is slated to close. Adding to the confidence were Trump's remarks that he would consider postponing the deadline, but that he "would prefer not to."

From a technical perspective, the sharp market rally on Tuesday boosted the S&P 500 to a tentative breakout above key resistance - in this case, the 200-day moving average, currently around the 2743 level. The S&P 500 (SPX) hit an intraday high around 2748 before closing at 2744.73. In the process, the benchmark index hit a new two-month high, exceeding early February's high. Though Tuesday's breakout was very tentative and could easily turn into a downside reversal situation, investors' bullish sentiment is palpable. With any further bullish momentum this week that clears the 200-day moving average resistance, the next major upside target is around the 2815 resistance area.

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