Bullish. Even though February’s long-term record has been spotty, DJIA has advanced for eight straight February’s while S&P 500 have been up in seven of the last eight. In midterm years, February’s performance has been above average, DJIA and NASDAQ +1.0%, S&P 500 +0.7%. However, February’s following big January’s (+4% or more) have declined or finished with a less than 1% gain 65% of the time.
Frothy. Yes, the record is broken. Bullish sentiment is still running near multi-decade highs according to Investor’s Intelligence Advisors Sentiment survey. Extreme levels of bullish sentiment are generally considered not good. However, as long as the market continues to rise (and valid reasons do exist for it to do so) a significant change in sentiment is unlikely.
Accelerating. Fourth quarter U.S. GDP is currently forecast at 3.4% by the Atlanta Fed’s GDPNow model and the labor market remains firm with 148,000 net new jobs added in December. Corporate taxes have been cut and many companies are paying out bonuses, increasing pay, announcing intentions to invest in the U.S. and expand hiring. Earnings season is underway and already there is some confirmation that growth has accelerated.
Overbought. Stochastic, relative strength and MACD indicators applied to DJIA, S&P 500, NASDAQ and Russell 2000 are at or near overbought levels. Recently, similar situations were followed by brief periods of sideways (to slightly lower) trading before the next leg higher occurred. Considering the underlying momentum in the market, this will likely be the case this time around; any weakness could be considered an opportunity to add to existing long positions or to establish new positions.
1.25-1.50%. As of today, CME Group’s FedWatch Tool is showing just a 4.6% probability of another rate increase being announced at the end of next week’s FOMC meeting. This will be Janet Yellen’s final meeting as Fed Chair. Jerome Powell will become the 16th chairman on February 3. Considering he has served on the Fed’s board since 2012 and has voted in favor of every action taken since then, the transition will most likely be smooth and the path of rate increases will likely remain slow.