Stock Market Euphoria Firing on All Cylinders

Meltups and running stock markets refer to euphoric periods when equity prices rise rapidly and continuously without corrections. It’s a time when stocks can rise on negative news and technical indicators can remain overbought for an extended duration with less volatility. Classic longer term examples of this during our record decade plus Bull market occurred in 2009, 2013 and 2017 when stocks appreciated to overly exuberant levels for over a year without a notable correction.  The run higher over the past 3 months has also been relentless, sending our own preferred metrics to extremes we normally would label a Sell. So far we have consistently resisted shifting from our Bullish near term and long term outlook and have stated that we did not expect a short term top until at least mid January when the China Trade Deal is signed and not until the SP had moved into the 3280’s. Investors can remain long term Bullish, while the risk of a normal correction greater than 5% will rise after the January 15th and the 24th inflection dates pass and increasing risk (>10%) as we move through February while near rally highs. Indicators are clearly entering overbought zone.

With the SP 500 Index testing the 3290’s, sentiment near record overbought extremes and a momentous Trade Deal signing on January 15th, it confirms that our ideal 3 month old forecast is being achieved this week and some caution into early February is warranted. Trump’s masterful manipulation of market expectations stimulating a steady flow of buying the rumors of a China trade deal, has kept downside risk at bay since October. Buy the Rumor has worked well for investors and soon we may see if there is a Sell the News aspect to the old adage as the details of the trade deal surface and the earnings season kicks in this week. Should the SP surge past 3300 after the 15th we could see a minor overshoot in values to SP 3320 to 3340 and Dow 29,400 to 29,600.

Signs of a notable short term top should manifest in January. Lack of commodity buying from the China trade deal may be a warning of a negative surprise in the short term, however, “if” the Dollar breaks support at 96 and Soybeans and Hogs move to new 2020 highs, then there could be a renewed equity market buying binge. While stocks are due for some corrective action by the end of January, a transition to a lower Dollar and stronger commodities trend would signal that a cyclical global economic rebound had begun with new buying in stock indices led by Emerging markets. A stronger Dollar in February would spell trouble for the stock market.

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