From my seat, it is clear that the stock market continues to consolidate the gains enjoyed post-tax reform. Yes, it is true that things may have gotten a bit exuberant during January. And as a chart of the S&P 500 clearly shows, those gains have been "taken back" over the past two months as the blue-chip index currently stands about where it did at the end of 2017.
After Friday's earnings from the likes of JP Morgan (NYSE: JPM), Citigroup (NYSE: C), and PNC Financial Services (NYSE: PNC), the question of the day is if expectations have gotten too high for the current earnings parade. To be sure, JPM's earnings were strong. And yet the stock dropped 3.6% on Friday while Citi's shares fell 3% and PNC's dove 4.5%.
In addition, the major indices gave up Friday morning's early gains, succumbing to selling throughout the day and finishing in the red. The bears tell us this is a harbinger of bad things to come.
Or, was Friday's action typical of a market that is being driven by headlines - most of them bad - and/or traders (and their computers) wishing to avoid the potential weekend headline risk?
According to FactSet, EPS for the S&P 500 companies are expected to grow by 17% over last year's levels, which would represent the strongest quarter of earnings growth since 2011. As such, the bulls suggest that the recent corrective/consolidation phase in stock prices will be resolved to the upside. Yet, at the same time, there is a fair amount of talk in the bear camp about "peak earnings" and the idea that it will be downhill from here.
The bottom line here is this is what makes a market. It is said that the stock market represents the manifestation of sentiment in motion. Personally, I think this is a pretty good assessment of the current market as traders and investors duke it out over both their near- and longer-term views - and then vote with their feet.
The good news for those in the bull camp is that the important support zones have held. It can also be argued that we're seeing some decent "basing" action here. So, based on the readings of my favorite longer-term market models, I will continue to side with the bulls and assume that the current skirmish will end favorably.
What could change my mind, you ask? Two things. First, if the models on my Primary Cycle board start to break down, I'd be forced to take some risk off the table. And second, if the major indices were to make a meaningful break below their recent lows, I would have to assume that stocks have further downside exploration ahead.
But until/unless either of these two conditions arise, I'm going to stay the course. I will also do my best to ignore the near-term bouts of volatility in the stock market, which, in my opinion, are driven by computers and represent more "noise" than substance at this time.
Thought For The Day:
One simple act of kindness can do more to inspire others that a dozen lectures on the virtues of being a thoughtful citizen. -Wayne Dyer