Market Direction Week of July 18, 2016

Market Direction: BULLISH alert issued 6/2/2016

Last Week Review: The bullish alert is still working after seven weeks. Stocks were up for the third week in a row, reaching a series of record highs. The swift post-Brexit rebound has been driven by falling treasury yields (making bonds more expensive compared to stocks), better than expected economic data, and higher expectations for company earnings growth. Remember, economic and earnings growth drives stock prices over time, so don't let scary headlines drive your investment decisions.

The S&P 500 has risen 8% since the Brexit fallout, due in part to the collective "deep breath" in which investors have recognized that the global economy won't do a 180 degree turn based simply on the UK's decision. But there's more: During this time, the U.S. jobs report showed the strongest monthly hiring since last October, monthly retail sales rose sharply with three-month growth now the strongest in more than a year, and global challenges have increased the likelihood of additional stimulus around the world (most notably in Europe, Japan and China).

How the market finished last week, the S&P 500 up 1.5%, the Nasdaq up 1.5%, and the Dow up 2.0%.

This Week: Brexit concerns have seemingly given way to an equity rally fueled by low interest rates and a strong labor market. As earnings season continues next week, a lack of bad news may be all that is needed for the SPX to finally reach a new all-time high. 

 

The market seems to have realized that while the fallout from the Brexit referendum could last a very long time, it is unlikely to affect US markets at all in the near-term. Market indicators are all over the map again and while the SPX seems likely to reach a new record high next week, it could also be met with a combination of earnings concerns and technical resistance resulting in more volatile moves. As a result, the consensus of the indicators points to Moderately Bullish with a good chance of at least a few more Volatile moves next week.

We are unlikely to get through the week without any developments on the Brexit front, although with the new Conservative government now in place some of the uncertainty will have disappeared. It is still not clear when any negotiations between the UK and the EU will get underway, and questions over the next steps will likely still be unanswered when Friday rolls around.

Volatility has eased off slightly, but with the summer period looming the potential for excitement remains with us.

Economic Calendar: Treasury International Capital (7/18), Philadelphia Fed Business Outlook Survey (7/21), Leading Indicators (7/21), PMI Manufacturing Index Flash (7/22)

Some of the major earnings announcements on deck: NFLX, GS, MSFT, JNJ, LUV.

 

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