by Daniel Carter
Two weeks ago, I wrote an article explaining why I thought the stock market would have one more major rally before the end of this economic cycle. In that article, I explain that jobless claims are still shrinking, the yield curve is still flattening, and investor sentiment is not euphoric. All of these can be thought of as bullish in the short to medium-term. This week, we continued to get bullish signs (technically and fundamentally) and might be about to go on a quick ride upward.
Here is what the stock market looked like two weeks ago:
The price was being compressed within a standard triangle pattern. These patterns can be bullish or bearish depending on which side the price breaks. Fortunately for my thesis and asset positioning, the pattern broke to the upside this week. Now I am looking for price to retest the pattern and then continue to the upside. I am also looking for volume to rise to confirm the breakout. Below is an image of what may unfold.
We also got more good news about the economy last week. The unemployment rate has dropped to its lowest point in almost eighteen years. This came as a pleasant surprise to many investors, including myself. It has been a very long cycle and I had anticipated that we were nearing full employment.
Earnings for corporate America have been solid as well. For the 444 companies out of the S&P 500 that have already reported earnings, 77.7% beat Earnings Per Share (EPS) estimates and 75% beat revenue estimates. Although the market had already anticipated strong earnings, and therefore efficiently priced them in, it is a sign that the economy is still stable.
I anticipate holding my stocks for at least the next month, but I will do so extremely cautiously. Make no mistake about it, we are absolutely near the end of this bull market. Valuations are still stretched, the yield curve and unemployment numbers are near a bottom, and political instability around the world is becoming more of a concern by the day. Everyone should have an exit strategy in case things turn sour.
I will be monitoring key technical supports, such as the 200-day moving average, and macroeconomic metrics to alert me to any serious problems in the market. Develop and test your strategies, do loads of research and don’t take too much risk. If you are dealing with a lot of money, you should consider consulting a financial professional as well. Thanks for reading and happy trading.