Our June outlook was for continued gains throughout July until the Federal Open Market Committee (FOMC) meeting July 30th when a rate cut would be announced. With the market fixation on the Bullish high odds prospect of a Fed Funds rate cut to 2.25 percent, there were no news events likely that could derail the Buy the Rumor psychology in July. While trader Call option buying sentiment has been overbought the last 2 weeks, we have yet to see small investor sentiment or greed gauges (green and red lines in chart below) reach overbought levels since their major peaks in 2018. Earnings continue to beat expectations this year and we wouldn’t be surprised to see margin improvement with year over year material and capital costs dropping along with slowing labor inflation.
The ExecSpec early 2019 forecast for new highs by summer have been achieved and prices are currently perched near minor short term resistance. However, we have two more potential upside targets this quarter and higher prices are needed if our remaining indicators in the chart above are going to reach an overbought condition. The near term risks are: (1) the best companies have already reported earnings this season, (2) the China trade talks start this week with news risk in August, (3) junk bonds are diverging from stocks since late June, (4) stock market breadth is negatively diverging from prices and (5) some investors may be disappointed if the Fed doesn’t cut rates by 50 basis points creating a Buy the Rumor, Sell the News reaction. As outlined below, the next near term resistance above here is in the SP 500 Index 3050’s to 3070’s. Should these levels be reached this week, the odds of an August correction will rise sharply. SP 500 Index maximum upside potential is 3200 this year after a potential pullback in August.
Our overall forecasts for 2019 remain supportive with more new highs until overbought extremes occur. The US remains the best location for equity appreciation led by information technology and consumer discretionary coinciding with business productivity spend and optimistic consumers with excess savings. A strong sector rotation to emerging markets, material and cyclical stocks await a reversal of the strong Dollar trend and a conclusion to the China trade deal.