Market Tone Likely to Remain Positive in Short Term

Market Updates

Market Tone Likely to Remain Positive in Short Term

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses the recent equity rally and current market technicals.

January 26, 2017

Since the “Trump Trade” rally peaked on December 13, the S&P 500 has built a tight base (2282‐2233). As of January 24, the S&P 500 “officially” broke out of the base with a new intra‐day all‐time high of 2284 and a new all‐time closing high of 2280. If the market does not roll over in the coming days, more upside is likely to follow. Yet, we temper enthusiasm as the upside remains limited, in our opinion, to somewhere near 2320 in the near term. This is just 1.75% higher than the 2280 close on January 24. Nevertheless, the breakout does support our general view that the market tone will remain positive for the short term.

The 9%+ rally after Trump was elected President and the Republicans swept D.C. was based on the belief that economy-stimulating fiscal reform would come. Now, with valuation full and more consideration being given to how challenging reform will be, another runaway rally for equities in the near term does not seem like a high probability. Yet, with sentiment positive in anticipation, the bulls are likely to retain control over the next few months. In such a case, pullbacks should be limited.

If the above scenario proves accurate, the market is likely to continue in a rotational trading pattern as money moves from overbought sectors to oversold sectors. Tweaking portfolios to take advantage of such rotation may enhance returns.

Technical picture remains healthy. As referenced above, the market managed a new breakout on January 24. Avoiding a quick rollover will be the next step the market needs to achieve. Regardless, should the breakout be proved valid, we do not feel a large percentage move is forthcoming. The simple price target on the S&P 500 produced by the breakout is about 2320 or just under 2%. If the market quickly rolls over, we believe a level near 2237‐2238 (‐2%) looks like good support for the short term.

In sum, the odds of a generally favorable environment for the bulls is likely to remain in place for the near term. The price breakout (should it be maintained) on January 24 further supports this thought. Political news flow will be the major influence in the coming months, as the current equity market price level is the result of anticipated fiscal reform. If it appears that reform will be realized, stocks will likely make the next meaningful leg higher. Any disappointments, and a normal pullback (5‐10%) or greater is likely to develop. It will take months for all this to play out. For now, animal spirits are alive and well, providing a tailwind for the bulls.

Source: FactSet, Raymond James Equity Portfolio & Technical Strategy

The information contained does not purport to be a complete description of the securities, markets, or developments referred to in this material, is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation. Past performance may not be indicative of future results.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. All opinions are as of posting date and are subject to change without notice.

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