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The Fed and big earnings will show whether this was just a bear market rally

Joe Fahmy
Contributor
Is this just a bear market rally? Or did we start a new bull market? Image: Getty

Is the stock market in a bear market rally? Or did we start a new bull market in late December? This seems to be one of the biggest questions on investors’ minds right now. To help answer this question, I posted a Twitter poll to get a pulse on the retail investor. Nearly 2,000 people voted, and 61% believe we are in a bear market rally. I still think it’s too early to tell, but we should get a clearer picture at the end of this week with many big names reporting earnings and a Federal Reserve meeting on Wednesday. Let’s look at the positives and the negatives.

Positives

The Breadth Thrust Indicator: This technical indicator was developed by the famous investor Martin Zweig. It occurs when, over any 10-day period, the number of advancing stocks on the NYSE outnumbers declining stocks by an average of at least two to one. It happened during the first two weeks of this recent market rally and usually signals the start of a potential new bull market. According to Mike Cintolo, the chief analyst at Cabot Wealth, “Such powerful upside momentum is rare to see. This signal has happened just 10 other times since 1960. Three months later, the S&P 500 has rallied as much as 12%; six months later, as much as 18%; and a year later, as much as 25%! Thus, even though the market is ‘overbought,’ it tends to be a ‘blastoff’ signal, leading to much higher prices down the road.”

Digesting Bad News: The market is holding up well since late December, especially considering the lowered guidance by many notable companies such as Intel, Apple, Samsung, Macy’s, Caterpillar, Whirlpool and Nvidia. From the close on December 24, 2018 to the close on January 25, 2019, the S&P 500 bounced 13.3% and recovered over half of the decline since it peaked on September 20, 2018. Considering all the negative earnings news and the constant political headlines, the market has digested its recent move well and is currently consolidating in the 2600-2675 range. A break above this range will give us a clue if the next leg will be higher or if the market wants to retest its December lows with a break below this range (see chart).

Chart is provided by MarketSmith.


Negatives

The market is still below its 200-day moving average. Many technicians feel this level is the red light or green light to determine the market’s health. If we do see a break above 2675, the 200-day (around 2740) will likely be the next area of resistance.

In a recent article, I mentioned some of the headwinds facing the market such as slowing earnings, higher interest rates, and the China trade war. These challenges are still applicable nearly a month later. I still expect many CEOs to continue with their conservative guidance given the many uncertainties right now. Regarding interest rates, on January 4, 2019, Fed Chairman Jerome Powell said he will be “patient” on rate hikes. Although this gave market participants some relief, many are still waiting for a clearer and more specific path on interest rates. Hopefully, we will get this on Wednesday when the Federal Reserve concludes its two-day meeting.

What to watch this week

Back to the original question: Is this the start of a new bull or just a bear market rally? Only Tony Romo may truly know the answer but keep your focus and attention on the earnings this week from big heavyweights such as Apple, Microsoft, McDonald’s, Visa, Facebook, Boeing and Amazon. These reports along with the Fed meeting on Wednesday should give us a clearer picture on the market’s next move, but we will likely see volatility around all these headlines. As always, know your time frame and stay focused on your longer-term investment objectives.

I can be reached at: jfahmy@zorcapital.com

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