Hold On — It’s a Pivotal Week for the Stock Market

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The near-term balances in the U.S. stock market are increasingly tilted toward a corrective move in the broader stock indices. There, I said it. Now, does this mean the broader secular bull market is over and it’s time to head for the hills? Not really. Big picture stocks are likely still to be a growthy asset class for years to come, although every bigger correction of course begins in the near-term. As such it is best to monitor markets week over week and month over month.

Hold On -- It's a Pivotal Week for the Stock Market

Measured by large economic news events, the week ahead is a monster: Tuesday evening President Donald Trump addresses the nation in his first State of the Union speech. This is followed on Wednesday by the FOMC interest rate decision and on Friday with the employment report for the month of January.

Is all of this plenty of data to move markets up or down in a meaningful fashion? You betcha!

Meanwhile, the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) last week continued to push higher and thus further into record overbought territory, at least as measured by the MACD momentum oscillator at the bottom of the chart below.


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Moving averages legend: blue – 8 day, yellow – 21 day

Also note that the SPY ETF has traded above its 8-day simple moving average (with exception of one day) since mid-November 2017. That streak too is impressive to say the least.

Until a notable daily or, better yet, a weekly bearish reversal rears its head, however, the upside momentum remains to be respected. From where I sit however this current juncture makes for an awful reward-to-risk area to add to longer-term long positions. In fact, I have seen an increasing amount of smart money investors buy index protection in recent weeks, so you know.

So, what are the odds of a February pullback in stocks (say 5% or so in the SPY ETF)? Considering  the overall extended nature of stocks and the upcoming avalanche of large-cap tech stock earnings the first week and a half of February, a pullback in February seems a reasonable expectation.

Furthermore, the recent selling pressure in the U.S. Dollar has also helped push higher dollar denominated assets such as stocks, oil and even gold. In other words, there is an inverse correlation between the dollar and these assets.

On the below chart I plotted the price of oil as represented by the United States Oil Fund LP (ETF) (NYSEARCA:USO) (red line) versus the S&P 500 and the price of oil in green and blue respectively.


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Considering that the USD looks to have reached oversold levels, any USD bounce from this oversold spot should matter for stocks (i.e. could lead to selling pressure in stocks).

This type of correlation analysis among stocks and other asset classes matters big time and not taking this into consideration in any stock market analysis is risky to say the least. If you would like to learn more about this type of a top-down approach, I am holding a special webinar for Investorplace readers on Tuesday, Jan. 30. Register HERE.

In summary, stocks have had a strong start go 2018. While economic underpinnings remain solid, it does not mean one has to pay any price to buy stocks at this juncture. I fully expect 2018 to be a more volatile year for stocks and buying opportunities will more plentiful after corrective moves than chasing the all time highs.

Check out Serge’s Trade of the Day for Jan. 29.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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