View From the Hill: SP-500 Overbought Market Still Requires Respect

Posted on Posted in Equities, Views From The Hill
SP 500 etf market summary
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Comments: The SP-500 (SPY) logged its 5th consecutive day and 4th consecutive week of new record highs. To state that equity markets are overbought would be an understatement. However, the recurring pattern in this market has been one of consolidation followed by breakouts, which represents a textbook confirmation of a bull market and should be respected by all with the exception of speculators. Remember, the objective of this game is not to perfectly time the highest high or lowest low, but to avoid the most collateral damage when there is a shift in the primary trend, which has yet to occur.

Driving today’s SP-500 and other equity markets were strong economic data and passage of a budget resolution by legislators, both of which are expected to support economic growth, jobs and justification that the proposed tax reform plan might be affordable.

 

  • Central Banks/Europe: Minutes from the ECB’s central bank reveal that it is still not quite ready to taper or pull the plug from its QE program, thus stimulating the environment for further economic growth.
  • US Jobless Claims: Results for the week of Sept-30-2017 were @ 260k vs consensus @ 265k and prior @ 272k, which is surprising given the backdrop of the Hurricanes Harvey, Irma and Maria.
  • US Factory Orders: Demand for capital goods registered an increase in August-2017 @ 1.2% vs consensus @ 1% and prior @ -3.3%.
  • Passage of Budget Resolution: GOP House members passed a $4.1 trillion dollar budget resolution, which included major spending cuts that are interpreted as supportive measures enabling it to proceed tax reform legislation that will give tax relief to middle class Americans and significantly reduce corporate taxes from 35% to 20%. (Note to all: there is no such thing as a free lunch.)

 

In summary, Financials (XLF) and Information Technology (VGT) sectors provided leadership while Telecom (IYZ) lagged. In commodities, energy, represented by the US Oil Fund (USO), emerged as one of the day’s top gainers. Market complacency or fear remains at all-time lows as the VIX (VXX) declined another –3.26%.

*As an added footnote, the Nasdaq-100 (QQQ) reached a new record high after consolidating for the previous 5 weeks. Clearly, the bulls are in control. 

 

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