S&P 500 Eclipses 2800; 5 Signs Why This Market Rally May Heat Up In 2018


Are investors getting tired of milestones by now?

[ibd-display-video id=2382612 width=50 float=left autostart=true] A day after the major indexes suffered their first distribution day of the year, stocks resumed their bullish stance that had pervaded the second half of 2016 and all of 2017. And this time, tech stocks refused to sit out.

While the Dow Jones industrial average certainly led the way, rising almost 1.3% for its biggest single-session gain so far in 2018, the other important benchmarks were not far behind. Apple ( AAPL ), up more than 1.6%, helped drive the Dow Jones industrial’s advance. It did the same for the Nasdaq composite, whose 1% rebound obliterated Tuesday’s 0.5% decline in higher volume.

The S&P 500 rose 0.9%, topping the 2800 level for the first time, on the back of a wide rally in shares ranging from homebuilding to semiconductor equipment, computer networking (a top 10 industry group, as are the homebuilders) to coal (No. 8 through Tuesday’s close), mortgage services to gaming software. The S&P SmallCap 600 rallied almost 1%.

Sector indexes also rose, but lagged the broader ones. The Dow Jones transportation average rose nearly 0.3%.

If there was a blemish on the session, perhaps it was that volume declined on both the Nasdaq and the NYSE. In a strong market uptrend, you generally want to see stocks rise in higher volume and fall in lower trade. Tuesday and Wednesday represent the exact opposite pattern. However, turnover on the Nasdaq was sharply above the 50-day average of around 1.97 billion shares.

So, were the institutional equity trading desks getting busy to work in only the 10th trading day of the year? It sure felt so.

The Market Pulse table shows a big wad of top-rated companies, most of them trading at least $25 million to $50 million in average dollar volume each day, rising in heavy volume. Take that as good news for stockpickers.

As seen in the General Market Indicators page, the IBD Mutual Fund has been mildly outperforming the S&P 500 since Jan. 1. Through Tuesday’s close, the former was up 4.1%, the latter up 3.8%. (Click on the latest version of the charts via the PDF link at the bottom of this article.)

While President Trump’s tax reform continues to provide a pleasant shower of effects on corporate earnings, consumer sentiment, and the possibility of further U.S. economic growth, lately the headlines on the bond market seem to be taking on bigger importance. The phrases “yield curve flattening” and “inverted yield curve” are likely to show up more on readers’ TV, PC, iPad and cellphone screens. Why? Wall Street is largely expecting the Federal Reserve to raise the short-term cost of money at least three more times this year to match the three hikes of a quarter-point each made in 2017.

Such monetary tightening is helping to push the rates on short-dated U.S. government debt up at a noticeably faster rate than longer-term bonds. And some veteran debt market observers believe that with inflation still below the Fed’s minimum target of 2%, there isn’t much of a force to knock rates on the long end higher. Thus, a flattening slope of the Treasury bond yield curve has some folks on Wall Street worried about the economy’s future.

Without question, consensus is growing that interest rates are going higher, and that’s already hurt some sectors such as utilities. The Dow Jones utility average rose nearly 0.7% on Wednesday, but at 687 it is still down 5% since Jan. 1. The Dow utilities are also in an intermediate-level correction since topping at 778 on Nov. 15.

Yet the stock market is proving that even in approaching Year 10 of its secular rally since the March 2009 bottom, it’s still showing the ability to climb the so-called wall of worry.

On Wednesday, the yield on the benchmark U.S. Treasury 10-year bond stood at 2.58%, still firmly above a 2.04% yield for the 2-year note and 1.44% for 3-month T-bills. In other words, the yield curve is still positive in slope. That’s good for the stock market; banks and financial institutions can still make money by “borrowing short and lending long.”

A big sell-off in 10-year bonds would likely send the yield past the March 2017 mid-term peak of 2.62%. That would mark a historic moment for interest rates in the U.S., affirming further declines in bond prices and higher yields. The next target for bond watchers would then likely be the 3.04% peak seen at the end of 2013.

At some point, institutions would then buy back bonds at yields they feel are attractive relative to the returns expected for stocks. But the forward-12-month earnings yield for the S&P 500, now hovering near 5%, remains far superior to the yield of even the longest duration bonds of U.S. Treasury debt, the 30-year bond, whose yield is currently at 2.75%.

Here are four more factors that may help equities continue to pad their gains since the latest major follow-through occurred by the Nasdaq on June 30, 2016.

Broader market participation . For years, it seemed only internet and tech shares were doing all the heavy lifting for the indexes. But for months, commodity, consumer, software, transport and financial shares are now rising in lock step with many of the best techs. This has helped keep the breadth of the overall advance strong.

The Nasdaq’s advance-decline line saw an unwelcome divergence in October to mid-November, sinking even as the Nasdaq composite itself rallied into new high ground. That implied fewer companies, mainly large and megacap techs, were lifting the index. But that trend ended, and for the past eight weeks both the A-D line and the Nasdaq itself have been rising together.

Bullish action by leaders . Many of the IBD 50 stocks trucked higher on Wednesday, while some padded their gains after breaking out. Even after Tuesday’s pronounced profit-taking, few top-notch stocks are sinking back to their proper buy points, let alone triggering the golden sell rule of investing .

Looking at the IBD 50, more than half of the list is currently showing EPS estimates of 30% year-over-year growth for the latest quarter. That more than meets the C in CAN SLIM .

Economic data remain strong . Industrial production expanded 0.9% in December, beating the Econoday view of 0.4%. Inflation is tame. U.S. crude oil prices are firming above the $60 level, but are miles below the bubblelike peak of $140 years back. The Fed’s Beige Book survey, released on Wednesday, noted continual expansion across regions and a “robust increase” in activity as reported by the Dallas Federal Reserve Bank.

Investor optimism rising . A 66.7% bullish reading in the latest weekly Investors Intelligence survey may frighten some contrarian-thinking readers. It’s the highest reading since a 68.3% figure in April 1986. However, the market can continue to rally in a meaningful way even with the bulls ratio at a 60%-plus level for weeks or months at a time. The bulls-bears indicator has a stronger track record for helping to mark major market bottoms, not market tops.

Certainly, though, excessive optimism can send stocks up wildly. Treat that as a good time to take at least some profits. Yet for now, few leaders are going into climax runs. Not every leading stock, for now, is going to behave like Bitcoin in the fourth quarter of 2017.

( You can trade the IBD 50 in one click with the Innovator IBD 50 ( FFTY ) ETF. Find out more on this top-performing ETF here . Also, follow Saito-Chung on Twitter at @IBD_DChung for more analysis on top growth companies, charts and financial markets. )

View the General Market Indicators chart page here .


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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