Momentum continued early Wednesday as global markets rallied on the back of the big U.S. gains Tuesday. There appears to be a lot of pent-up investor demand after six down weeks in a row.
Some of the hardest hit stocks clawed back Tuesday and early Wednesday
FIGURE 1: WHO’S SCARED OF FALLING RATES? Apparently not Financial stocks, as the sector had its best day in a long time on Tuesday. This one-month chart shows Financials getting a 2.7% lift despite rising hopes of the Fed cutting rates, something that usually weighs on bank stocks. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Twice Bitten? The old expression, “Once bitten, twice shy” might apply to the stock market, though maybe it’s more appropriate to say “twice bitten.” That’s because twice in the last year—once last summer and again this spring—stocks leapt to all-time highs as the U.S. economy continued to chug along with solid economic numbers, only to see those rallies stopped cold. Now the Fed is widely expected to begin cutting rates before the end of the year. Some analysts think that could put new vigor into stocks, which have often raced higher the last few years every time the coast seemed clear. Putting aside Tuesday’s big rally, investors might be a bit more shy jumping in, especially with trade battles unresolved and economic numbers starting to ease both here and abroad. The latest reading of investor sentiment from the American Association of Individual Investors showed just 24.8% bullish, with 40.1% feeling bearish.
Technical Barrier Could Loom for Rallies: Another possible rally stopper could be on the technical side of the equation. Some analysts see a “double top” in the 2930-2950 area for the S&P 500 Index (SPX), with those levels representing all-time highs made last September and briefly exceeded in April. This sort of chart pattern could represent a challenge to overcome. While a resolution on trade issues and possible lower interest rates would likely put new life into stocks—and that’s a big if with the trade situation the way it is now—it’s still sometimes tough for markets to push past technical patterns like the one faced by the SPX. It’s possible that selling pressure could get amped up if the SPX starts testing those highs. It might also set up an interesting battle between fundamentalists and technicians.
Brexit Still in Background: Even if trade issues get resolved this summer, another geopolitical challenge might face investors as the leaves turn gold. The prospect of a “no-deal” Brexit waits in the wings, and as veteran investors know, the market tends to shy from uncertainty. The EU has agreed to push the deadline for a decision back to October 31. Potential outcomes include Britain scrapping Brexit altogether, ratifying the withdrawal agreement, or leaving the EU without a post-Brexit plan in place. But if there’s still no U.S.-China trade deal by October, then Brexit headlines could remain a secondary worry.
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