January 22, 2020

Don’t look now, but the rally that has taken the Dow, S&P, and NASDAQ to new lifetime highs has the look and feel of extending its run. Liquidity from the Fed boosting its balance sheet, the signing of the Phase One deal last week, and the passage of the USMCA deal is just the latest set of catalysts to pull more of that $1.4 trillion in cash and short-term instruments off the sidelines and into equities.

The S&P 500 was thought by many to run into severe resistance at 3300, thinking that would trigger the most-wanted 5% correction of all time. Cash-rich investors, not wanting to pay up for stocks at current levels, are seeing one market threat after another fall by the wayside. And so bullish momentum is now taking over – the kind of momentum which can last for weeks.

Standard and Poor's 500 Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What’s more, earnings are looking like they might surprise to the upside in a broad-based manner. Aside from scandal-ridden Wells Fargo (WFC), the big banks posted Q4 numbers that shined this past week. JP Morgan (JPM), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), State Street Corp. (STT), and BlackRock Inc. (BLK) all crushed estimates.

Navellier & Associates does not own J.P. Morgan (JPM), Citigroup (C), Goldman Sachs (GS), BlackRock (BLK), Morgan Stanley (MS), State Street Corp. (STT), or Wells Fargo (WFC) in managed accounts but does own Bank of America (BAC),. Bryan Perry does not own J.P. Morgan (JPM), Citigroup (C), Goldman Sachs (GS), BlackRock (BLK), Morgan Stanley (MS), State Street Corp. (STT), Bank of America (BAC), or Wells Fargo (WFC in personal accounts.

Even more impressive, the market is broadening out – a technician’s utopian scenario. The majority of the S&P’s 11 sectors are steaming ahead. Not only did the tech and financial sectors provide stellar leadership, the industrials, utilities, consumer discretion, consumer staples, homebuilders, and healthcare all traded to new all-time highs this past week.

Only energy, real estate, materials, and transportation have not posted new lifetime highs, but we’re in a very orderly market where every sector is eventually getting its turn. Energy may be a holdout, but new highs for real estate, materials, and transportations look inevitable in the not-too-distant future.

This kind of breadth is the stuff of extended rally phases and should carry the market higher through the heart of earnings season. Taking into account this broadening momentum, the market may not take a breather until early-to-mid-February, when the investing landscape will be devoid of any fresh catalysts. At that time investors’ attention will likely turn to the Fed unwinding their overnight repo operations six months down the road and the election primaries that are sure to give reality TV a run for the money.

Sector Breakouts from Two-Year Bases are a Serious Market Tell

What is very telling is that some of these sectors I’ve noted have broken out of bases going back as much as two years to January 2018 and thus have real room to run. The old Wall Street saying of “the longer the base, the bigger the rally” still holds true in most cases. This is not a market to sell short. Sure, taking profits on select sectors like tech and healthcare that are trading well north of their 10-day moving averages makes sense, but there are hundreds of large-cap stocks that are just now coming to the party.

Standard and Poor's 500 Industrial Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Standard and Poor's 500 Cons Disc Sector Index Chart

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Standard and Poor's 500 Cons Staples Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Standard and Poor's 500 Utilities Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Standard and Poor's 500 Financials Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Standard and Poor's 500 Homebuilders Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

My take is that a good portion of sideline cash will have capitulated and piled into stocks by Valentine’s Day, only to have their hearts temporarily broken because the most heavily-weighted, overbought, and technically-extended sector – technology – will be pulling back hard and removing froth from the rally.

Standard and Poor's 500 Info Tech Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That doesn’t mean they won’t ultimately be right if they hold through what I believe will be a shallow pullback to 3,150-3,200 for the S&P, or 5% below where the index currently trades. Tech will back and fill in a constructive manner, find buyers at rising support lines, and very likely lead the S&P to 3,500.

Could the pullback come earlier? Sure, as noted, the tech sector is way overbought, but again, the move up is broadening out, the sky is clear of trade threats and recession fears, and the earnings parade is about to come marching down a Wall Street that is sitting on a lot of cash.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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