Mid-Month Update: Foundation in Place for Next Leg Higher
By: Christopher Mistal
March 16, 2017
A mid-March blizzard in the Northeast may be atypical weather for this time of the year based upon historical weather data, but the market’s performance thus far in March has been much more typical. The month began with well above average gains on its first trading day following some welcome comments in President Trump’s first address to Congress the prior evening. Weakness followed on the second trading day and the market was moving largely sideways to lower until yesterday (11th trading day). Even that jump higher is visible in the 21-year March Market Performance charts below
[DJIA, S&P 500 and Russell 1000 March Seasonal Pattern Chart]
[NASDAQ and Russell 2000 March Seasonal Pattern Chart]
Compared to DJIA, S&P 500 and Russell 1000, NASDAQ and Russell 2000 are generally slightly softer in March. This has certainly been the case with Russell 2000 this year. Even after yesterday’s solid advance, Russell 2000 is still down so far this March. Modest weakness today, the day after a Fed meeting is not uncommon, but bullishness on and after St. Patrick’s Day, along with Triple Witching Friday is likely to put the market back on typical March Performance track higher. But, the last four trading days of March can see modest declines due to end-of-month/quarter portfolio restructuring and profit taking.
However, the market could regain momentum and blast right through typical end-of-quarter weakness. The recent retreat from all-time highs and sideways to lower trading action has caused bullish sentiment to ease. According to the most recent Investors Intelligence Advisors Sentiment survey bulls have retreated from a high of 63.1% at the end of February to 53.4% while the correction camp has swelled to 29.1%. The only slight concern is the limited number of bears at just 17.5%. This easing in bullish sentiment does suggest that the rally could resume.
Technically, recent action has also worked off many of the near or outright overbought technical indicators. Stochastic, relative strength and MACD indicators applied to DJIA, S&P 500 and NASDAQ are all positioned in neutral territory while Russell 2000’s indicators were near over sold levels. In addition, major support levels for the indices all held during recent weakness. This suggests that the market could be positioned for another leg higher.
A move higher is largely supported by economic data as well. Full-year corporate earnings for the S&P 500 are estimated to rise by 10.5%. February’s jobs report was better than expected with 235,000 net new jobs added and the unemployment rate ticked down to 4.7%. Headline CPI data has inflation trending higher and year-over-year figures have been above 2% for three months in a row. The last time year-over-year CPI was above 2% was back in spring of 2014%. Economic growth, measured by GDP, is forecast to be tepid in Q1 at just 0.9% according to the Atlanta Fed’s GDPNow model, but Q1 has not been the strongest quarter for growth in recent years. Recent poor Q1 economic weakness could be due to winter weather or a post-holiday reversal.
Even though the Fed did raise its benchmark rate to 0.75 to 1.0% at its meeting yesterday, interest rates are still highly accommodative within historical context. And there was little in yesterday’s statement to suggest that the Fed will accelerate rate increases anytime in the immediate future. And even if they did hasten the pace of increases it would not necessarily be a substantial impact on major multi-national corporations that could still borrow overseas where rates are even lower. Borrowing to fund buy backs and dividends would still continue which is supportive of higher market levels.
And let’s not forget the campaign promises of the Trump Administration. Lower taxes, less regulation, healthcare overhaul, infrastructure and defense spending being the largest and potentially most influential to markets. Very ambitious goals indeed that might take longer than expected to achieve in any form, but they will most likely remain the main focus of the new Administration. Fully changing the course of a $4 trillion-plus a year bureaucracy is not going to happen in a 100 Days and it may not happen in the first year, but the idea will be there to support the market.
So as we head toward April, the last month of the “Best Six Months,” we will continue to diligently hold long positions and prepare for the upcoming “Worst Six Months” as it appears the rally still has room to run.