How our analysts are assessing the market today, and what’s coming around the corner
“Where’s the market going next?”
That’s always the number one question on the minds of investors.
Of course, that doesn’t mean we’ll be seeing those gains come in a straight line …
The market has been on a tear in 2019, with the S&P up nearly 14% as I write. But just as runners can’t maintain a sprint indefinitely, so too do market’s need an occasional breather. And with the market trending sideways-to-lower over the last few trading days as they face key resistance points, that might be what we’re seeing.
So, to answer “where’s the market going next?” in today’s Digest, let’s again turn to our analysts to get some insights into the shorter-term headwinds we’re facing before this bull feels rested and ready to take its next climb.
***What small-cap stocks might be telling us about short-term resistance
John Jagerson and Wade Hansen are the editors of Strategic Trader. They’re two of the best technical traders in the business. From their update last Wednesday:
In last week’s update, we highlighted the reasons stocks could continue rising. Nothing significant has changed since then …
However, there are a few issues that could affect the bull market, including long-term resistance at the prior 2018 highs, and we think they’re worth monitoring.
From a technical perspective, one issue that worries us is the continued lack of confirmation from small-cap stocks. Gains in the Russell 2000 small-cap index were better this week, but the index hasn’t been able to sustain a resistance break above 1,590.
At this point, let me interject to make sure we’re all on the same page.
Traders are always looking for an edge in the markets. One of the “tea leaf” indicators they look at is the performance of large-cap stocks compared to small-cap stocks. “Cap” refers to “market capitalization” which is the price of the stock multiplied by the shares outstanding. Basically, it’s the stock’s “size,” so to speak.
Now, in a healthy market environment, it would make sense that all stocks — small and large — would be rising together. If not, then some traders see that as an indication that market gains aren’t uniform, which means there are cracks forming in the bullish action.
The term for this is “divergence.” It measures the performance gap between small-cap and large-cap stocks. As popular belief goes, if small-cap stocks begin to underperform, that’s a leading indicator, suggesting that large-cap underperformance may not be too far behind.
The Russell 2000, which John and Wade reference, is an index measuring the performance of approximately 2,000 small-cap stocks. You can think of it as the proxy for what’s happening in the small-cap world.
Back to John and Wade:
If the Russell 2000 is able to break to new short-term highs over the next few days, we would be much more confident that the S&P 500 will be able to achieve long-term highs.
Earnings are likely to be the most significant factor in determining whether the S&P 500 and Russell 2000 stock indexes continue to rise in the short term or are due for a pullback.
So far, the data look a little better than originally expected. Much of the good news has been boosted by disproportionately positive surprises from the banks, but there is still plenty of additional confirmation from other groups.
As I write Monday morning, the Russell 2,000 is trading around 1,596. We’ll be watching to see if this level holds.
As to what to expect next, let’s go back to our trading experts:
The breakout in the S&P 500 was just enough to take the index to its prior highs. We are concerned about a consolidation that could lead to a short-term correction at this level.
But the market’s trend is still positive, and the fundamentals haven’t dropped as much as originally feared. If the market pulls back, we plan to focus on areas of support to increase our bullish exposure.
So, John and Wade are watching the Russell 2000 and earnings. If we do get a pull-back, they’re viewing it as a buying opportunity.
***Meanwhile, fellow technical trader, Ken Trester is eyeing a potential market-breather before the next upside move
With decades of experience reading markets and charts, Ken is the editor of Power Options Weekly. On Friday, he updated his subscribers with his most recent market analysis. He starts by looking at the S&P’s action:
… I thought the S&P 500 index would test its all-time high levels set back in the third quarter of 2018, but I did not expect an immediate breakout above that level. That’s exactly what happened this week, as the index has now begun to stall out at resistance in the 2,930-2,940 area.
Now, what’s interesting is at this point in Ken’s update, he hones in on the same “small-cap versus large-cap” divergence which John and Wade described in their market analysis.
He starts by pointing toward positive earnings results from mega-cap stocks Facebook, Microsoft, and Amazon. With that large-cap context, he then pivots to small-caps.
Back to Ken:
However, while the large-cap indices are at or near new highs, we still have yet to see confirmation from the Russell 2000 small-cap index. The index has been lagging the other major indices for some time now and remains below resistance at the 1,600 level.
I would like to see a breakout on the Russell, which is still about 10% off of its all-time high, before getting too bullish again.
As to the ultimate takeaway on where we are today, and what to expect next, here’s how Ken wraps up his update:
If earnings continue to show that companies are faring well in this economic environment — they should since earnings expectations were quite low coming into this reporting season — then the market could continue its upside move.
But, again, overhead resistance for the S&P 500, as well as the Dow Jones Industrial Average, is going to be a challenge. I think the most likely scenario is that the market pauses around current levels and consolidates before the next upside move.
***Finally, legendary investor, Louis Navellier is also eyeing earnings as he assesses market conditions
Louis is a numbers guy. By that, I mean he digs into a company’s fundamentals — primarily earnings — to determine which stocks are poised to outperform. After all, the long-term driver of stock performance is earnings power.
So, when Louis evaluates markets, what he’s really doing is looking at how earnings are shaping up. On that note, last week he told readers that we’re headed into a tougher market environment … a “stock pickers” market.
From last week’s Accelerated Profits report:
I hate to be the bearer of bad news, but … I predict that a huge reversal in the market is coming. Now, I’m not talking about an economic recession, but rather an earnings recession. And it will have an impact on stocks as we move through the first-quarter earnings season — and into the second- and third-quarter earnings seasons.
The reality is that the earnings underneath the S&P 500 have fizzled due to more difficult year-over-year comparisons. You may have already noticed that many big multinational companies, like Apple, have warned that earnings and sales will slow down in 2019. Currency woes and an economic slowdown in emerging markets are also weighing on many multinationals’ top and bottom lines.
So, if you want to be successful in the coming months, you must avoid stocks with drastically slowing earnings and load up on stocks that can sustain positive earnings momentum.
While earnings are still rolling in, Louis tells us that first quarter results are still expected to decline 3.9% overall.
Now, just because some companies are feeling this earnings pinch, it doesn’t mean it’s time to get out of the market. In fact, Louis tells us that a narrower market will actually benefit those select companies that are posting great numbers.
I imagine this as a game of musical chairs — as you remove additional chairs (the companies with poor earnings), everyone scrambles for the remaining chairs (the companies with great earnings). That demand should act as a tailwind for the stock prices of those quality companies that Louis identifies.
Louis just released an informative new video presentation, in which he goes into more detail on the earnings recession, as well as certain stocks he likes. He’s allowed me to post it for a limited time, so if you’d like to watch it for free, just click here.
In the meantime, as John and Wade, and Ken noted, we’ll be paying especially close attention to what happens with small cap earnings. If they exceed expectations and the Russell 2000 can push past resistance levels, we’ll be looking for the S&P to break out of its consolidation stage and continue its move higher.
We’ll continue to keep you updated.
Have a good evening,
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