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Stocks Set for Record Run as Risks Multiply

stocks - Stocks Set for Record Run as Risks Multiply

Source: 401(k) 2012 via Flickr

U.S. stocks continued their perfect start to 2018 on Tuesday, rising yet again despite turmoil in the bond market and in cryptocurrencies. Also weighing was news overnight that the Bank of Japan had decide to taper its bond purchase program — a major sea change for a central bank that has really typified the extreme post-crisis money printing mentality.

In the end, the Dow Jones Industrial Average gained 0.4%, the Nasdaq Composite gained 0.1%, the S&P 500 gained 0.1%, and the Russell 2000 broke the trend to fall 0.1%. Treasury bonds were hit hard, gold declined, and crude oil gained $1.64 to close at nearly $63-per-barrel.

Breadth was negative, with decliners outpacing advancers 1.7 to 1.2. At the industry level, auto and energy stocks led the way higher with gains of 1.8% and 1.5%, respectively. Airlines were the laggards, down 1.3%. Intel Corporation (NASDAQ:INTC) lost 2.5% amid ongoing fallout from the recent news of processor vulnerabilities and the performance cost of needed fixes. Drugmaker Allergan plc Ordinary Shares (NYSE:AGN) gained 3%.

The big news was the whipping 119% gain in Eastman Kodak Company Common New (NYSE:KODK) after the company announced it would use blockchain technology to help photographers secure their digital rights.


It sure feels like maybe, just maybe, stocks will never go down again as Wall Street enjoys a rip-roaring start to 2018.

The dynamics are familiar: The economy is strong and about to enjoy a boost from the implementation of the GOP’s recently passed tax cut plan, inflation remains tepid, the Federal Reserve’s rate hike campaign is proceeding cautiously, and corporate earnings growth has been solid.

With the S&P 500’s gain on Tuesday, stocks have risen 2.9% for the year-to-date, rising in each and every session so far. According to Jeff Hirsch at the Almanac Trader, this performance along with the solid run to end 2017 suggest the new year will be a great one for investors. Over the last 39 years, when stocks performed this well the rest of the year showed gains 87% of the time with an average rise of 14%.

Even long-time market skeptics like GMO’s Jeremy Grantham says markets could be headed for a “melt-up” scenario. In a letter to investors, he wonders if we are entering the final, most ebullient phase of this long bull move.

Jason Geopfert at SentimenTrader notes that the gains are part of a globally synchronized market with “extreme momentum” on display. The weekly Relative Strength Index across six major worldwide stock indices is now at the highest level in history. Counterintuitively, such extreme readings have in the past been associated with further gains. The type of “melt-up” move Grantham warns of.

But this comes in the context of a near-record number of days the stock market has gone without a normal 5% correction, as shown above. For world stocks, this is the longest streak without a 5% correction in history. And it comes as multiple Wall Street brokerage year-end targets have been hit just days into the new year.

Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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