foxex: State of the Market

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Markets continue to charge higher ahead of State of the Union address.

Markets Close

Dow
25,411.52 +0.68%

S&P
2,737.70 +0.47%

Nasdaq
7,402.08 +0.74%

VIX
15.57 -1.02%

INV Anxiety Index
100.79 Neutral

US 10-Yr Yield
2.702 -0.81%

Markets Today

Another strong rally for U.S. stocks today as corporate earnings continue to top expectations. Here are some notables:

Disney (DIS) crushed earnings expectations on better than expected results from its television networks and theme park businesses.
Even SNAP beat expectations, posting a smaller loss than expected and reporting growth in its user base. Shares were up 20% in after-hours trading

We are six weeks deep into a stock market rally the likes of which we haven't seen since 1987. Since the lows of Christmas eve, the S&P 500 is up more than 16%. Nearly 8 percent of that gain came in the month of January as investors bought 'oversold' stocks that were beaten down in the Fall. February has started strong as the Federal Reserve has calmed everyone's nerves about raising interest throughout 2019. The rally has many investors wondering if stocks will retest their lows of 2018, or if they will continue to churn higher. Wouldn't we all like to know the answer to that question??!!

History can be somewhat useful, but as we know past performance is no guarantee of future returns. But, since history is the only prism we have, let's use it. LPL Financial tracked past sell-offs and recoveries since 2011 to identify the W-shaped recoveries when stocks re-tested prior lows before climbing higher against V-shaped recoveries when stocks bounced right off their lows and churned higher. It looks like this: (Zoom in for a clearer look)

Looking at the last major corrections, there was a double bottom in August and October 2011, a double bottom in August and September 2015, a double bottom in
January and February 2016, and a double bottom in February and April 2018. The pattern is strong, but it might not repeat this time around. Here's why, per LPL Financial

71% of the stocks in the S&P 500 have hit 20 day highs. The rally is broad based.
Stocks have risen during the third year (pre-election year) of every four-year presidential cycle since 1939.
The S&P 500 historically has gained an average of 32% in the 12 months following the midterm-year lows and has been higher every single time since
World War II.

Again - history is the only fact we can lean on here and patterns persist until they don't. But, you can't ignore the strength of the recent rally and the fading of the concerns that contributed to the selloff.

Read on: Four Key Forces to Drive the Stock Market in the Near-Term

State of the Union

This brings us to the prime time event here in the U.S. tonight, as President Trump speaks to Congress and the nation in a 'State of the Union' address.

The focus of tonight's address will likely be border security and reestablishing a policy agenda now that Trump is facing a Democratic majority in Congress, which has the political muscle to block his initiatives. That said, there are a few areas of compromise that both sides can count as wins if policies are passed.

A Trade compromise with China - recent indications are positive.
Reigning in prescription drug prices - lots of bi-partisan support for this initiative which Trump has championed since he was running for president.
Infrastructure spending. This was supposed to be a major part of the Trump presidency, but it has yet to materialize. The country needs it and it creates jobs.

Good reading on these topics:

Drug Prices set to Rise 6.9% in 2019

4 Stocks to Ride the Infrastructure Boom

Stocks to Watch in the US-China Trade War

James is back with some good knowledge on how the U.S. Dollar has fared of late in our Chart of the Day, below.

Speaking of jobs, U.S. employers added an average of 223,000 jobs per month in 2018, much higher than the 170,000 per month predicted. 248,000 of those jobs came from the manufacturing sector. That's impressive - if you forget the fact that 1.2 million manufacturing jobs were wiped out in the last recession. Still, growth is good when it puts people to work.

As for the stock market, President Trump likes to point to it in good times and bad. It's a score card for him, even though the stock market and the economy are different beasts. They can influence each-other, but they reflect different things. 2018 was not a year to celebrate the stock market, but since the President likes to point to it, we couldn't help but share this fun chart from Vox.com. Trump got to celebrate the DJIA crossing 25,000 twice in 2018.

Chart of the Day: U.S. Dollar Strengthens Ahead of State of the Union

The U.S. dollar index is a measure of the U.S. dollar against a basket of other major currencies representing key U.S. trading partners. This basket includes, in descending order of weight, the euro (weighted over 50% of the total), Japanese yen, British pound, Canadian dollar, Swedish Krona, and Swiss franc.

The USD index is arguably the best overall measure of dollar strength/weakness available. As shown on the chart, the dollar has been on the rebound from late last week. Prior to this rebound, the increasingly dovish stance taken by the Federal Reserve helped place some pressure on the greenback as the prospect of lower interest rates for longer continues to prevail. Last week's Federal Open Market Committee (FOMC) meeting was even more dovish than expected, pushing the dollar index down to its 200-day moving average.

Approaching Tuesday evening's State of the Union Address by President Trump, the dollar is in a relatively strong position. The one-year trend remains bullish, and both the noted 200-day moving average as well as the key 95.00 level are providing support for the index. For currency traders, and especially dollar traders, the primary event to watch for during Tuesday night's address will be any potential mention of U.S.-China trade. Any positive comments from Trump regarding this all-important trade relationship could extend the dollar's rebound.