9/27/2017: Dow 22340.71 | S&P 2507.04 | NASDAQ 6453.26 | Russell 2K 1484.81 | NYSE 12157.65 | Value Line Arith 5758.54
Psychological: Relieved. According to the most recent
Investors Intelligence Advisors Sentiment survey bulls jumped to 54.3%, bears are at 17.1% and correction is at 28.6%. This marks a reversal in trend of more bears and correction that occurred throughout August into September. The market may have successfully navigated the worst two consecutive month stretch of the year, August-September, based upon historical performance, but October still lies ahead. VIX declining back below 10 warrants attention as the string of closes under this level in July preceded a brief bout of market weakness.
Fundamental: Stalled. Final Q2 GDP came in at a revised higher 3.1%, the best reading since Q1 of 2015, but Q3 and beyond is not expected to be as strong. Atlanta Fed’s GDPNow model is forecasting 2.1% growth in the current quarter. Unemployment has also likely bottomed, having switching between 4.4% and 4.3% since April. Corporate earnings forecasts for Q3 have also been trimmed.
Technical: Mixed. Small-cap Russell 2000 index has broken out to new all-time highs after spending much of the year lagging. DJIA, S&P 500 and NASDAQ all closed at new all-time highs in September, but have been struggling to maintain that momentum and move higher since. Although right on the verge of a unified move higher into record territory, the major indices still have not been successful. Looking back to previous jumps higher this year, such as late February to March 1 and early July through early August, this recent surge higher could be followed by a period of sideways to lower trading and a better buying opportunity than now.
Monetary: 1.00-1.25%. Employment and growth are acceptable, but inflation (measured by Fed’s choice of metrics, PCE) remains stubbornly below target. The Fed’s next move of rates could be December at the earliest. In the meantime, the Fed will begin to shrink its balance sheet in October. It will begin by not rolling over the first $6 billion in maturing Treasury securities and $4 billion of agency debt and mortgage-backed securities. Simply put they will begin taking liquidity out of the financial system at a pace of $10 billion per month to begin with. This liquidity was at least partially responsible for supporting the market since its March 2009 bear market low.
Seasonal: Improving. October is the last month of the “Worst Six Months” for DJIA and S&P 500 and the last month of NASDAQ’s “Worst Four Months”. In post-election years, DJIA has been up 11 times in 17 years with an average gain of 0.7%, but in the last three years ending in “7,” October has been trouble. In 2007, the bull ended and the financial crisis began, in 1997 DJIA plunged 12.4% and in 1987 the market crashed. Keep an eye out for our Seasonal MACD Buy Signal email Alert. It can trigger anytime on or after October 2.