Market Direction Week of October 30, 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. large-cap stocks were higher, reaching record highs for the sixth week in a row. Market gains were achieved with help from rising company earnings and easing political uncertainty as the Senate passed a 2018 budget resolution. The bulk of company earnings are set to come over the next two weeks; however, taking into account the nearly 20% of companies in the S&P 500 that have reported earnings for the third quarter so far, earnings growth is nearly 2%, and 76% of the companies have reported results above consensus estimates. We expect earnings to continue to rise at a solid pace through the remainder of the year, but earnings reports can prompt volatility in individual stocks.

This week French President Emmanuel Macron called a proposed Brexit deal from UK Prime Minister Theresa May, “a long way off”, implying that there is still much work to do to reach consensus. German Chancellor Angela Merkel added, “There has been progress, but it’s not yet sufficient to begin a second phase”. Both leaders want a larger financial commitment from May before discussing potential trade deals.

As part of a very long speech this week, Chinese President Xi Jinping presented a confident vision for a more prosperous future for China and its role in the world. He affirmed the need for a "still stronger" Communist Party, and said it was important to continue to wipe out corruption, curb industrial overcapacity, income inequality and pollution.

How the market finished last week, the S&P 500 up 0.9%, the Nasdaq up 0.4%, and the Dow up 2.0%.

This Week: A “melt up” is a bull market driven by the “FOMO” (fear of missing out) syndrome, rather than by economic fundamentals. The danger in a melt up is the subsequent melt down that can occur once everyone is in. While the current market has been described as such, I would argue that is a misnomer; this bull market is being driven by very strong fundamentals; thus its continued resilience.

Last week the indicators were nearly unanimous that a modest pullback was in the offing, and yet this week’s action was anything but. I think it is worth reminding all readers that what the indicators actually show is not what the market will do, but what the majority of market participants are doing. In other words, market participants may be preparing for a downside or an upside move, but that doesn’t mean it will always happen; just that if it does, they are in a position to capitalize on it.

The overall economic backdrop (especially the labor market) remains quite strong, and earnings season has been quite good so far, so continued low volatility is likely next week. Additionally, most of the changes were in a positive direction this week, so despite multiple new record highs in the SPX, participants are generally expecting no worse than a sideways week of consolidation.

It is a busy week on the corporate and economic fronts. The UK and US preliminary GDP estimates for Q3, plus flash PMIs for the eurozone and the US are highpoints. Meanwhile the ECB issues its latest rate decision.

Economic Calendar: PMI Composite Flash (10/24), Durable Goods Orders (10/25), International Trade in Goods (10/26), GDP (10/27)

Some of the major earnings announcements on deck: HAL, T, MMM, GILD, LMT, V.

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