Are There Any Lurking Risks to the Stock Market Rally?

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The market’s run over the past week has been surprisingly positive. We don’t detect any serious areas of weakness, but there are a few issues to monitor in the near term.

The breakout beyond the prior highs has reached its initial price target at $2,534.32 on the S&P 500 Index. This target is based on the typical proportional relationship between breakouts and Fibonacci ratios.

You can see what this looks like in the next chart, relative to the last two breakouts this year.

Source: S&P 500 — Chart Source: TradingView

Price targets themselves should not be considered a “lid” on the rally, but it is very common for a consolidation to occur in these regions. That isn’t necessarily bearish, but it could present new opportunities to enter a long position if stocks pause.

Europe Risks

The vote in Catalonia to declare independence from Spain passed, with over 90% of the eligible and surviving ballots selecting “yes.” However, the Spanish constitution has no such provisions for regions to seek independence, and the federal government is unlikely to lighten up its police-intervention against protestors, polling stations and illegal meetings.

From a market perspective, we aren’t concerned about a chain reaction being unleashed and dissolving the European Union. However, civil unrest in Europe has been an issue for the banks over the past few years, and Spanish banks are particularly ill-prepared to deal with economic turmoil from a widening crisis.

The short-term effects are likely to weaken the euro and dampen European stock values. The more unlikely, but serious effect would be to reawaken a slumbering Greek crisis.

The Fed’s Shortlist

President Trump’s advisors have delivered a so-called “shortlist” of new Federal Reserve board members, including a possible replacement for Fed Board Chair Janet Yellen. So far, the list for Fed Chair still includes Yellen, in addition to Gary Cohn, Kevin Warsh (a former board member), Jerome Powell (a current board member) and John Taylor from Stanford. The new names on the list would fall further on the hawkish side of monetary policy, which could change how accommodative the Fed will be in 2018.

A more hawkish Fed isn’t necessarily bad for the banks, but it could drag on technology and retail stocks, which may be a longer-term problem. It is common for a president’s administration to anonymously “float” some of the names they may be considering for the Fed to the public and then gauge the market’s reaction. That seems to be the case this time around, but it is too early to get a feel for how traders are going to respond to a stingier Fed.

The Bottom Line

The market’s rally has been surprisingly robust. However, confirmation from transportation, small-caps and bond yields should increase confidence that it is not a potential whipsaw.

We are concerned about some of the uncertainties we detailed in this week’s update, but most of these factors are likely to develop over the intermediate term and don’t represent much of a short-term problem.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.

Most recently, John and Wade are co-options strategists of Turbo Trader Live — a live, interactive trading room service that runs two hours every trading day the market is open. Turbo Trader Live focuses on long call and put options, as well as long and short vertical spread strategies. Find out how to get in on the live trading action and start making real profits by clicking here.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/are-there-any-lurking-risks-to-the-stock-market-rally/.

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