Stocks in Rally Mode in Early Trading; Could it Close above 26,000 Today?

It's been only seven sessions since Dow passed 25,000. If it closes above 26,000 today, tomorrow or even this week, it's on track for a history-making event.

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(Tuesday Market Open) The stock market’s three major benchmarks marched solidly forward in the early going, putting the Dow Jones Industrials ($DJI) on pace to close above 26,000 in less than two weeks since it passed 25,000.

After a three-day respite, the Dow futures (/YM) traded higher in early trading by more than 200 points, following last week’s more than 500-point gain. (See chart.)

Much of this early action might have been predicated by yesterday’s movement in the futures markets, which traded in a shortened session. (The U.S. stock and bond markets were closed in observance of Martin Luther King Jr. Day.) Futures for the Dow Jones Industrials traded in triple digits while futures for the S&P 500 and the Nasdaq Composite were up modestly.

Typically, that could set the stage for stocks to respond accordingly, and market analysts said yesterday that it could help the markets repeat another run of record closes like it did Friday. Time will tell today.

All benchmarks tracked uncharted closes Friday to mark the best start to a new year of trading in 15 years. It marked the second consecutive weekly advance for the Dow and S&P 500 (SPX), and notched the seventh in eight weeks in positive territory for the two. The Nasdaq (COMP) also stayed ahead for the second straight week. The Russell 2000 (RUT) of small-cap stocks saw its biggest weekly gain since September.

Much of that market hoopla might have been tied to the onset of earnings season, which some analysts expect could end strong, coupled with the slump in the dollar, some market watchers said. The dollar fell 1% last week and headed lower yesterday but appeared to be crawling higher in the early going.

The losses were strongest against the euro, which struck a three-year high of $1.2274 against the dollar on Monday. The euro hasn’t touched the $1.2300 level since December 2014, according to FactSet. A weaker dollar is generally a plus for U.S. based multinationals when they translate their earnings into dollars. On the other hand, a stronger euro tends to drive the prices of European products up, sometimes hurting European exports. European stocks finished Monday’s session lower but reversed course at last check today as the Stoxx Europe 600 index headed toward its 2018 closing high of 400.11.

Earnings season got an official though somewhat rocky kick off on Friday. Wells Fargo’s (WFC) profits were slammed by litigation costs and JPMorgan’s (JPM) earnings were strong but got hit with one-time charges tied to tax reform, the companies said. Earlier today, Citigroup (C) turned in Q4 adjusted earnings of $1.28 a share, topping the $1.19 per share Wall Street consensus. The adjusted results excluded losses related to a $19 billion write-down on the value of deferred tax assets left over from losses from the financial crisis and $3 billion in expenses tied to the new tax law.

Other big banks on the earnings docket this week include Bank of America (BAC) and Goldman Sachs (GS), reporting ahead of the market open tomorrow, and Morgan Stanley (MS) before the open Thursday.

Dow chart

FIGURE 1: REWRITING RECORD BOOKS.

Futures prices for the Dow Jones Industrials (/YM) passed 26,000 in pre-market activity Tuesday. If the momentum holds, it could put the Dow in its fastest 1,000-point move in history. The arrows above show where the Dow broke 25,000 on Jan. 4 and where it passed 24,000 on Nov. 30. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Inflation on the Rise? That’s the word from some forecasters, according to the Wall Street Journal. Friday’s government reports showed that consumer prices edged up in December while retail sales growth was solid. Some analysts said that inflation expectations might finally be firming after a long—and perplexing—run of softness that has flummoxed the Federal Reserve. Core prices, which exclude the volatile energy and food prices, were stronger than expected, up 0.3% in December amid a 0.1% rise in the consumer price index.

“We’ve been seeing stronger gains in core inflation, and I think there are good reasons to expect core inflation will be stronger this year as well,” Michael Pearce, senior U.S. economist at Capital Economics, told the Journal.  

Don’t Be So Picky: It could cost you, according to Dynamic Competition in the Era of Big Data, a paper published on the American Economic Association’s website. Bloomberg summarized the authors’ look at the gains made from sophisticated forms of price discrimination that they gathered through eBay data. Basically, what if prices were based on your needs and characteristics, rather than the value of the product?

“On average, most consumers benefit from the introduction of price discrimination and that consumer surplus gains more than offset the loss in profits suffered by firms,” Bloomberg quoted authors Patrick Kehoe, Brad Larsen, and Elena Pastorino writing. Here’s the being picky part: “Consumers more certain about their tastes are, however, worse off under price discrimination.” The paper argues that is happening now and could be economically important down the road.

Fear and Greed: Investors are feeling quite insatiable these days, if you go by CNN’s Fear & Greed Index. At the close on Friday, the index, which tracks seven indicators of investor sentiment, reached an “extreme greed” reading of 79. That’s changed from a prior week “extreme greed” close of 75, a prior month “greed” close of 67 and a year-ago “neutral” close of 55.

Among the indicators watched is market momentum, which shows that the S&P 500 is 8.92% above its 125-day average. “This is further above the average than has been typical during the last two years and rapid increases like this often indicate extreme greed,” according to CNN.  

Good Trading,
JJ
@TDAJJKinahan

economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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