Tuesday’s Session was Cycle Day 3 (CD3): Price consolidated throughout the session before pushing higher to All-Time Contract High. Price settled above its Value Area High (4132.25). Range was 38.50 handles on 1.04M contracts exchanged.
…Transition from Cycle Day 3 to Cycle Day 1
This leads us into Cycle Day 1 (CD1): Normal for CD1 is an expectation of a decline measuring an average of 4088. Volatility Index (VIX) has registered a reading with a 16 handle, as bulls are solidly in control, so any decline may be relatively shallow. As such, estimated scenarios to consider for today’s trading:
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Chart of the Day
Projected P/Es Lower U.S. Stock Valuation More Than Usual
Projected earnings make U.S. stocks even less costly than usual relative to past results. Comparisons using the Russell 1000 growth and value indexes show as much. The growth index’s forward price-earnings ratio was 29% lower than the P/E derived from results for the previous four quarters. This gap was the biggest since February 2004, according to data compiled by Bloomberg. The comparable spread for the value index was 37%, the widest since December 2009. Both discounts were highlighted by Liz Ann Sonders, Charles Schwab Corp.’s chief investment strategist, in a Twitter post Monday.
S&P 500 Notches Another New High; Bank Earnings on Tap
The S&P 500 ground its way to another new all-time high on Tuesday, its eighth feat in the last nine trading sessions. The move continues to resolve higher despite what has become rather anemic trading volume.
That does raise some concern, particularly with the index coming into earnings after such a long extension. JPMorgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) will kick off earnings season, as all three banks report before the open on Wednesday.
The banks tend to experience a “sell the news” event from the early high, so look for a possible early rally that loses steam. Of course that’s not always the case, but keep that idea in the back of your mind.
While everyone seems to be looking for a pullback though, it’s prudent to remember one thing: Don’t Fight the Fed.
If we have to beat that saying to death, we will, but it’s simply too hard to short the market when there isn’t enough volume or two-way action. The Fed is in the driver’s seat, printing trillions of dollars in easy money and handing out cash like it’s going out of style.
Some of that money is inevitably going to find its way into the stock market and act as an underlying bid for equities. Based on today’s CPI report, it’s also clear that we have inflation running a bit hot — not that the market seems to care.
It’s also not a surprise, which is likely why bulls shrugged it off, as the S&P futures had some early jostling following the report (which came out before the open) and ultimately settled into a tight and boring trading range until about 2 p.m. when it broke over 4,127.
Our View: Yes, we’re overdue for some air to come out of the market. The main indices are extended from their short-term moving averages, there’s a little divergence on the daily charts and we’re on the cusp of earnings season. That said, we can’t fight the Fed. For now, we’re looking to buy the dips.
Danny Riley is a 39-year veteran of the CME trading floor. He ran one of the largest S&P desks on the floor of the CME Group since 1985.
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