It is interesting that passage of the tax bill near the end of the year resulted in a flat, sideways market. It seemed as though the tax cuts were already priced into the major market indices. But something happened over the holidays. The champagne must have still been flowing Tuesday morning as the market opened in the new year. The Standard and Poors 500 Index (SPX) jumped out of the gate and accelerated every day this week, closing today at 2743, up 19 points. SPX gapped open higher at each opening this week. I have never seen anything like it.
Trading volume in the S&P companies was above the 50-day moving average (dma) Wednesday and Thursday, but fell off slightly today. The price action this week was classic strong bullish behavior: gap opening higher, a market unfazed by any negative news, and strong above average trading volume.
I keep thinking this market has to take a breather at least, if not correct, but it keeps surprising me with its strength. Shorting this market is a fool’s errand.
The Russell 2000 Index (RUT) closed today at $1560, a new closing all-time high. RUT is the only major market index that has been trading somewhat more restrained. SPX and the NASDAQ have been setting new highs almost every day. All three indices closed at all-time highs today – think about that for a minute.
The NASDAQ Composite has also been gapping open higher all week, setting new all-time highs. NASDAQ closed at 7137, up nearly three percent in this four-day week! Trading volume in the NASDAQ composite companies ran parallel to SPX, peaking Wednesday and coming down slowly towards week’s end.
Market volatility, as measured by the S&P 500 volatility index, VIX, set new record lows this week, hitting levels below 9% intraday and closing as low as 9.2% yesterday and today. These record lows in volatility tell us that the large institutional traders don’t see much on the horizon to worry them. Of course, we have been seeing low levels of volatility for most of 2017. In fact, many gurus have pointed to that as an precursor of impending doom and gloom. It does seem reasonable to expect some slowing of this bull market. In fact, I would consider that a healthy sign. But we will have to allow some time for the euphoria of the corporate tax reduction to sink in.
I found it interesting that the FOMC minutes that came out this week showed that the committee members were increasing their GDP forecasts even before the tax bill passed. Remember all of the naysayers who said lowering corporate tax rates wouldn’t do anything for economic growth? Apparently the economists on the FOMC haven’t drank the political Kool-Aid.
Hard economic data continue to be at least moderately positive, with some measures coming in very strong, e.g., Chicago PMI at the highest level since March 2011. The corporate earnings reporting cycle has begun and the large banks are scheduled to report next Friday. Analysts will be watching those bank reports, and especially their forward guidance, very carefully. Presuming the majority of the corporate earnings announcements continue to show positive growth and optimistic future guidance, we may safely assume a continuation of this bull market. But that statement worries me…