Technical Break Out For Stocks
Even though the S&P 500 only rallied 0.45% and the Nasdaq only rallied 0.69%, this was one of the best days of the year for the market because it was a break out. The Nasdaq hit a record high as Apple, Amazon, and Microsoft drove the index higher with record highs of their own. Apple is closing in on a $1 trillion market cap as it is now at $943 billion. Apple’s Worldwide Developer conference was on Monday; Microsoft announced it is acquiring Github which represents movement towards courting software developers.
Specifically, Apple’s new iOS 12 will run faster as apps will load 40% quicker. Apple targeted speed improvements on its older devices to combat the notion that Apple purposely slows down older devices to make users buy the latest hardware. A couple of Apple’s updates hurt Facebook. Firstly, Apple will be eliminating 3rd party tracking on Safari. This includes Google and Facebook cookies. Secondly, Apple added a ‘do not disturb’ feature during sleep to block out app notifications. It is also adding a screen time feature which tells users how much they use apps to help them use some less. Users can decide how long they want to spend time on addicting apps like Instagram. If users are able to become less addicted to social media apps, Facebook will be hurt because many people view it as a waste of time.
The chart above shows how it was also an important day for the S&P 500 even though it is still below its all-time closing high. As you can see, the S&P 500 broke out of its 3 week trading range. As I mentioned last week, there didn’t need to be a major rally to break out of this recent range because it was very tight. The chart shows Morgan Stanley expects the S&P 500 to reach 2,800 to 2,825 in the short run. I’m more concerned with breaking the resistance set at the first failed new high and then reaching a new record high. Even though fundamental investors, who are concerned with valuations, will become more bearish as stocks rise, the momentum a new high will bring could push the market a few percentage points higher. After a 4 month correction, the S&P 500 isn’t going to decline after it makes a new high. Break outs, like we’ve seen in small caps and tech stocks, beget more buying.
Sentiment Looks Ripe For Stocks To Make New Highs
In order for stocks to rally sharply, there needs to be a cohort of investors who will shift from being bearish to bullish. In January, almost everyone was bullish which is why it didn’t take much for stocks to fall. January made it look like 2018 was going to be a repeat of 2017 which never had even a small 5% dip. It was exhausting for the bears as it was like getting run over by a literal stampede of bulls. Even though the stock market only fell 10% in this correction, the Investor Movement Index, which is a TD Ameritrade retail investor sentiment indicator, fell to 4.79 last week. The lowest point in the early 2016 correction was 4.33 which is a similar level. If this is a bottom in sentiment, there’s a plethora of buyers who could push the S&P 500 to a new record high.
Review Of Other Markets
The dollar index fell 0.18% to $94.02. The decline from $94.83 on May 29th helps the tech sector slightly. The tech sector has driven this bull market since 2009, so it’s critical to future equity performance. Business is booming so the sector doesn’t need a weak dollar; it just needs to avoid a continuation of this uptrend which began in mid-April.
The 10 year yield and the 2 year yield increased sharply, supporting the ‘risk on’ trade which includes an increased chance of rate hikes. The 10 year yield was up 4 basis points to 2.94%. It’s now 17 basis points off its May high. The 2 year yield was up 4 basis points as well to 2.52%. It is only down 7 basis points from its recent high showing how much the curve has recently flattened. The difference between the two yields is now about 43 basis points. If stocks rally along with a flattening curve, there is still a lot of juice left in the fruit that is this bull market.
The oil market continues to decouple from the stock market as oil fell 1.6% to $64.75 on Monday which is an 8 week low. Even Brent fell 2% to $75.29 which is almost a 4 week low. American production hit 10.47 million barrels per day in March which was a record high. It appears like the prices will stay around where they are now until we get information about the June 22nd OPEC meeting.
OPEC is expected to raise production to quell worries about the decline in production from Iran because of American sanctions and Venezuela because of its economic collapse. This is a ‘sell the rumor buy the news’ type situation as oil is already lower in anticipation of this action. If the decision meets expectations, I think oil prices will move up after June 22nd. I’m surprised to see the S&P 500 energy sector is only down 4% even though oil is down 10%. The rising tide of the stock market is helping all sectors.
Conclusion
The stock market is finally following the strong fundamentals as earnings growth looks strong and economic growth in Q2 will be above 3%. With the technicals now showing the market should be bought and the Fed not tightening too quickly, only negative geopolitical headlines can stop the market from hitting a record high. The biggest event on the geopolitical front is the North Korean summit in Singapore on next Tuesday. After that, in late June, we’ll learn about the European tariffs on American goods which will counter the American steel and aluminum tariffs on the E.U.