On Tuesday, President Trump will deliver what will essentially be his first State of the Union address. On the table are the budget, healthcare reform, tax reform, and more. Regarding taxes, many retailers are concerned about a potential BAT (border adjustment tax). While the White House has said it opposes the specific plan being passed around the house, there is indication that they are open to some kind of BAT.
The S&P 500
The S&P 500, along with the DJIA and the NASDAQ, opened lower. They were down for most of the day, but the bulls managed to take back control during the last hour of trading. Volume for (NYSEARCA:SPY) was low for most of the day, suggesting that traders were looking for direction.
The markets were dragged down primarily by the financial sector. What is interesting about that is the fact that it has primarily been the financial sector which has been responsible for the recent increase in the S&P. In the past year, while the S&P 500 has grown by roughly 21%, the S&P 500 financials grew by more roughly 42%.
While I am not a fan of going all in on technical analysis, I do use it as one of many tools. Furthermore, I rely on both western and eastern methodologies for analyzing price histories. These both help gauge investor sentiment, which drives market direction. It may also help determine how receptive investors will be to positive or negative rumor and news.
The overall trend in S&P 500 has been positive lately, but over the last few days, a few bearish signals have emerged. Tuesday into Wednesday saw a two-day pattern known as a "descending hawk." While it is weak, prices for the second day were within the open and close of the prior day's candlestick. This pattern emerges in an upward trend and can signal a reversal.
Following that pattern, we saw a hanging man candlestick on Thursday. This again is often bearish; however, it is not a very reliable signal in and of itself. Friday's end of the day upswing seems to have crushed the signal, at least in the one-day time frame. But in the two-day time frame, there is still a bearish dragonfly doji.
USD/JPY has been on a downward trend over the last few days, and continued that trend, despite the sharp rise in stocks, which managed to actually bring the S&P and the DOW to new highs, again. Since the JPY is generally seen as a safe haven for investors, it could suggest that there is at least some growing uncertainty in the markets.
Currently, the yen is nearing support of ~111.50. The last time it crossed this level was in late November. If the yen breaks below that level, I do not really see much support until roughly 108.
Look to the News
I do not think that price histories are the only thing that drive investor sentiment, but what this suggests is that investors are starting to get a little concerned. At the very least, they are consolidating. Whether that means for a pullback or for the next burst of new highs is yet to be seen. Investors may want to see something which confirms their bullish sentiment.
And in that regard, at least in part, the ball is in Trump's court. A solid tax plan from the White House would be a start, and we might see something on Tuesday. However, if the White House fails to deliver, that could further the concerns of investors and increase the odds of a correction. Given the disagreement between the White House and congress over the BAT and other details of the tax plan, it seems likely that disappointment is in the future.
Monday and Tuesday will give us a fair amount of information about the direction of the market. A gap down in the (SPX), following the dragonfly doji, would make me more comfortable in predicting a correction, especially if prices fail to move above 2,352.87. At the very least, it will mean that investors are going to be receptive to the uncertainties in the markets and economy.
I will also be looking to the VIX and VIXY to confirm a shift in investor sentiment. But these have to rise significantly before I am certain that investors are finally letting bad news sink in. Finally, I will be looking to USD/JPY to see if it breaks below price support. If it does, it, like a spike in VIX, would indicate a rise in investor concern.
Next week I will be keeping an eye on Trump and the White House. I still highly doubt we will see anything resembling a solid tax plan for a while. The White House will have to come to some kind of agreement over the BAT. Also on Tuesday, we will get a revised estimate for Q4 GDP and a reading on consumer confidence.
Disclosure: I am/we are long VIXY, SH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also short USD/JPY.