Market Direction Week of October 16, 2017©

Market Direction: BULLISH alert issued 9/21/2017

Stock on the Radar (STAR)© was launched 6/19/2017 Sunday evening. When there is a new stock recommendations for the week it is typically made available late Sunday, so investors can prepare to take a position when the market opens Monday for trading.

Last Week Review: U.S. stocks were higher in the first week of the third quarter's earnings season. While most of the companies that have released earnings so far are from the financial services sector, 81% have reported better-than-expected results. With stock valuations well above historical averages, we expect market gains will be driven by increasing corporate profits. This can come to fruition as earnings are expected to rise by 3% in the third quarter. Headlines from Washington remained in the spotlight as President Trump signed an executive order to cut off subsidy payments to insurance companies that provide Obamacare health plans, along with heightened concerns that the U.S. will leave the North American Free Trade Agreement.

Like last week, one of the top stories in Europe again is the independence movement in the Catalan region of Spain. The Catalan leader, Carles Puigdemont did not officially declare independence but instead said he was willing to discuss the issue with Spanish President Mariano Rajoy. Notwithstanding the illegality of the effort from the Spanish Government’s perspective or the potential for civil war, it is worth noting that an independent Catalonia would not automatically be part of the European Union, a consequence that could have significant financial ramifications to the region. Despite this temporary pause for negotiations, as I stated last week, “This issue is likely to get even worse before it improves”.

Rhetoric out of North Korea has been relatively subdued this week except for comments from Foreign Minister Ri Yong-ho reiterating that President Trump has effectively “lit the fuse of war against us”. A Bloomberg news story published on Wednesday (10/11) also indicated that North Korea is “preparing to fire multiple short-range rockets” on or around the opening of the Communist party Congress next Wednesday (10/18). Previous displays of this nature have not generally resulted in market pullbacks.

How the market finished last week, the S&P 500 up 0.2%, the Nasdaq up 0.2%, and the Dow up 0.4%.

This Week: We think the outlook for U.S. economic growth remains at 2% to 2.5%, slightly faster than average in this long-running expansion. Although the hurricanes are likely to reduce the economy’s growth rate short-term, rebuilding as well as signs of strong manufacturing and services activity suggest stronger growth ahead:

Consumer confidence remains high, supported by solid job growth, rising wealth and still-low interest rates. We expect more optimistic consumers to continue spending, and the pickup in global growth is also positive for the U.S.

The possibility of corporate and individual tax cuts has improved the prospects for growth in 2018 and beyond, aided by ongoing regulatory relief and still-low interest rates.

Upside momentum seems to be finally showing some signs of exhaustion, and the indicators say at least a modest pullback or bout of profit-taking is likely in order for next week.

Earnings season really starts to ramp up next week with several bellwether financial, technology, industrial and staples companies scheduled to report. Barring any renewed tensions with North Korea, next week’s market action is likely to be driven mostly by these earnings reports.

The exception of the VIX index (which can change in an instant) the indicators are unusually aligned this week. There is little doubt the market is overdue for at least a modest pullback and with potential for overly optimistic earnings expectations to be met with some selling pressure, the indicators imply that could occur next week.

Economic Calendar: International Trade (10/17), Industrial Production & Capacity Utilization (10/17), FOMC Minutes (10/20)

Some of the major earnings announcements on deck: SCHW, NFLX, IBM, JNJ, UNH.

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