Why is the stock market making new highs again on Friday?
Is it because…
- 128,000 jobs added for October announced when you need 150,000 jobs added each month just to keep up with population growth.
- -2.7% average earnings decline from Q3 announcements noted by FactSet.
- ISM Manufacturing 2nd straight month in contraction territory at 48.3.
OK…I was kidding. We all know that investors are paying zero attention to the fundamentals at this time. So these speed bumps were ineffective in slowing investors down.
Once again, the only thing on their minds is the odds a trade deal coming together with China. And yes, that took another positive step forward Friday as the Chinese administration said that they have come to agreement with the US on core points and the deal will progress forward. The exact date of signing is still a question mark…but likely to be resolved soon.
This begs 3 vital questions about the market that I address below.
Question #1: How High Can Stocks Go Without a Trade Deal in Hand?
We pondered this question last week. I stated that 3,100 was the likely limit to market upside without a deal being finalized. And that prediction still seems on target today.
Remember that every 100 points for the S&P has proven to be an important level of resistance for the market. This time would be no different.
Yes, that is only 1% above Friday’s close. However, you have to consider how far we have run up to this point including the 7.4% rally from the October 3rd low. And the +22.3% year to date gain. In that light, a near term top of 3,100 is not so bad.
Question #2: What Happens After the Trade Deal is Signed?
Stocks will likely burst higher on the news. Like a sudden 2-3% sprint to new record highs. After that I bet we would be in for an extended bout of profit taking.
Nothing ominous meant by that statement. Just that market often needs to take a step back to digest gains in hand before it is ready to move forward. So a 3-5% pullback would just be standard operating procedure.
Please remember that the market typically rallies in anticipation of these types of positive events. Which explains the 7% gain this last month alone. So the after the fact upside will be limited before traders would want to lock in these gains with an extended round of selling.
Question #3: What Will Stocks Do if the Trade Deal Falls Apart.
Exhibit A is the 7% cratering of the market at the end of July when both sides last pushed away from the trading table. We probably would get a repeat of that nasty sell off. Maybe worse because the economic data is so much weaker at this time.
It does seem more and more that the two sides are in concert on this trade deal. The corroboration of that by China today was a refreshing sign that it’s not just the US administration talking up the likelihood of the deal.
Unfortunately we are always bad headline away from triggering that sell off. This means we all have to sleep with one eye open for that negative turn of events. Until then, cautious optimism is the right approach.
What to Do Next?
Keep looking for the healthiest stocks to add to your portfolio. The links below will point you in the right direction:
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Editor, Reitmeister Total Return
.INX shares rose $0.12 (+0.04%) in after-hours trading Friday. Year-to-date, .INX has gained 24.14%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More…
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