Momentum Outmuscles the Bears!

In order to really understand the dynamic playing out now in the American stock market, it’s best to rehash what happened this Friday. Friday couldn’t have been a more crystal clear example of the forces at play. I.B.M. (IBM) and American Express (AXP) released disappointing numbers on Thursday evening. On Capitol Hill, the Senate didn’t succeed in reaching a budget deal to keep the federal government running. And in financial markets, the bond yield climbed to levels not seen since 2014, the U.S. dollar likewise falling to its lowest level since 2014. It would seem like a surefire recipe for a market correction. You couldn’t ask for more than that, especially when on a technical basis, markets are stretched. At the same time, a glimpse at the results in Friday’s trading shows that the large indexes succeeded in climbing – and setting additional new highs, the NASDAQ rising 0.55%, the S&P 500 tacking on 0.44%. In summary, the market saw sweeping gains all week long. The S&P 500 climbed 0.9% to 2,810 points. The S&P 500 is now up 5.1% since January 1st.

The counterintuitive response of the market to all of the abovementioned negative developments could perhaps be summed up in one word: momentum! That’s what the upswing is all about! Momentum is a very powerful market force. Momentum can overcome all negative news, laughing in the face of a technical overbought state – and most importantly, rip bears to shreds! Those who defy momentum, pay a very hefty price.

The momentum, though, won’t last forever, though those who think that they have the ability to time it just right, essentially fail to understand something very basic. Momentum has no sense of proportions or underlying rationale. It lacks all affiliation with sensibility. Momentum, simply put, is fed by the reality that it’s been along for too long, that it’s defied the very odds predicting its demise. Momentum tends to strengthen precisely when you’d think that it’s on its way out!

Momentum doesn’t need much in the way of justification. The concern about being left behind is one of its main components and as of now, the optimism about the earnings season, which just began, provides ample cause for unimpeded gains! Arguments about prices being too expensive have no bearing on reality when expectations hinge on and are founded on momentum.

Momentum, amazingly, isn’t cause for celebration among market players. Rather, it creates fear. Fear of not being part of the party. Fear about being the odd man out – and concern about underperforming when up against the large indexes. And likewise, fear about not making enough money! Momentum crushes those who’d have the gall to try to time the market just right – and also those, who’d be brazen enough to fight against it. Momentum makes short shrift of any persuasive argument, as persuasive as it might be.

How can we best cope with the untamed and seemingly unstoppable market momentum?! We relish it. We ride it. We respect it. And we try to jump on the bandwagon as much as possible. The time will come when the market crescendos then dives – and then we’ll see that momentum also works in the opposite direction. Momentum has no loyalty, and it’s simply impossibly to expect it to persist forever. On the flipside, trying to guess when things will reverse course is a worthless and fruitless pursuit. Rather, we need to stick to the momentum in so far as it’s possible.

As of now, there are enough individual stocks with charts with solid technical patterns, i.e. which are not stretched. Their state isn’t similar to the indexes, which don’t seem too attractive right now. There’s no question that the indexes need a breather, but there’s enough rotation taking place to prevent that from happening right now.

All of the technical and fundamental arguments why the market needs to take a turn for the worse are still in effect. And it could be that they’re even stronger now on the heels of a number of disappointing earnings reports. What the market bears are lacking is price movement which backs up their claims. For the time being, what’s dominating the market is momentum, and that’s all that matters!

The earnings season is picking up this week with high profile reports from Netflix (NFLX) on Monday, after closing, and industrial giants like Caterpillar (CAT) and Procter & Gamble (PG), which should create interesting movement with a lot of trading opportunities all week long. Likewise, airline firms will be reporting this week, United Continental (UAL) releasing its numbers on Tuesday, and American Airlines (AAL) reporting on Thursday. Furthermore, there are number of key economic reports that will be released this week, including durable goods orders and the revision of the Q4 GDP growth reading this Friday. In the event growth comes out as forecasted, it would be the third quarter in a row with growth of at least 3%, a solid and consistent pattern not seen since 2005.

Another focal point this coming week will be the 10-year T-bond yield. The yield on the issue climbed to a high of 2.65% last week – for the first time since 2014. Stock market investors will continue to eye bond yields, which are still not high enough – presumably – to create competition vis a vis the stock market and upset its magnificent run. In the event bonds’ yields approach the 3% level, then we’re talking about a level that’s expected to spook investors and put a spoke in the wheels of the stock market rally.

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