The Fate of the Equity Markets Leading Into a Seasonally Strong Period

US 1877 Bond

Equity Markets Enter Seasonally Strong Period

While it is never pleasant to see red in the morning, a little context always helps gain some perspective. As the equity markets enter the seasonally strong months of the year, a small pullback of 3% – 5% seems both plausible and a bit overdone. If sales and earnings were dismal, we would be more concerned.

SPY – Seasonally Strong Start

The S&P500 SPDR ETF started the year with 4 consecutive weekly gains. Targets and support areas are shown on the weekly chart of SPY. Maximum drawdown anticipated would generate (-7.00%). For that to happen, a major disruption in profit projections and expectations would be all over the news. We anticipate SPY will pullback into the zone between these two areas of support.

SPY-weekly-02-02-2018

JUNK Bonds (JNK)

Junk bonds are a good barometer of investor’s risk appetite. This asset group tends to lead the equity markets, with added emphasis on downward moves. Targets and support areas are shown in the weekly chart, When JNK starts to show weakness we can assume equities will follow.

JNK Weekly Seasonally Strong Months

In March 2017, Junk Bonds led the markets lower. The resulting move culminated in a (-3.20%) drawdown, the maximum for the year. Sales and earnings were good for most companies in 2017.

Sales and Earnings Beat Expectations

In 2017 most companies were rewarded after reporting an increase in earnings and sales. This year investors are selling the news, marking a noticeable change. If companies were reporting dismal results we would have a more bearish view of the current environment. Also, consider the global economic expansion. A noticeable change in market sentiment, would be a reason to be more concerned. Tax reform and repatriation add to the equity market safety net.

Big banks and regionals led into the closing bell on Thursday. We are anticipating strength will persist.

Bottom line: Until we see a noticeable change, we are longer-term bullish.

Futures are weak on NFP strength.

Happy trading,

Vinny

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Banks and Financial Stocks – Watching Capital Flows

 

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Investment Warnings

We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.

Vinny Gambini

Trade Fundamentals w/ Technical Analysis - CANSLIM method using high probability setups and Ichimoku Trend Analysis. Architect, Family Man and Father of three.