State of the Stock Market Analysis for the Week Ending on February 18, 2018 Market Corrections Has Consumer Confidence Returning 2-18-18)

All You Need Is Jobs

Last Friday it looked as though the stock market was set for a Monday meltdown, but oddly enough, that did not happen. We somehow saw a vibrant rally, and the rally seemed “real” because there was no intervention from Mario Draghi of the ECB, nor was there help from the U.S. Federal Reserve. The rally magically happened, and it gave bulls the reassurance that free markets somehow work. The last thing our stock market needed was having new Fed Head Jerome Powell saying anything. We went through a “high-speed” correction, and somehow saw a “high-speed” bounce that erased whatever could have been worse.

For the week, we saw some impressive numbers among the major indices. Friday closed sort of flat and mixed, but for the week, the Dow and the S&P 500 gained 4.3%, while the Nasdaq rose by 5.3%. The Volatility Index (VIX) closed to week below 20, and the yield on 10-year U.S. Treasury finished the week at 2.88%, so these numbers seemed to help with this week’s rebound. The VIX drama will get some attention in the weeks ahead, so we will see how that unfolds. The longer-term yields seem to be heading higher, but at least we did not see a dangerous spike this week.

Consumer confidence and new home sales were solid on Friday, which likely helped the stock market. It was not an overly bullish day, but it was still a solid enough stock market to close out an extremely strong week. From a technical standpoint, seeing the major indices dip below their 50-day moving averages is unsettling to the bullish camp, but seeing the major indices rally back quickly and move back above those important levels is a big plus as we head into the rest of February. While some technicians are saying the rally might be “too far and too fast,” most bulls are not complaining.

The key now is for economic numbers to remain strong, and for investor confidence to hold up well. The tough part is what happens if the longer-term interest rates keep edging higher. The new “line in the sand” is a 3% yield on the 10-year U.S. Treasury. We are in new territory above where bond guru Jeff Gundlach warned of, so we will see if these heightened rates will eventually affect the broader stock market. The economy is strong, and wage inflation could be waiting in the wings. This gives the Federal Reserve a “green light” to raise rates two or three times this year, so we will see what happens.

There are interesting developments with the “mega-tech” FANG stocks. They are impressive companies, but the buzz on Wall Street is that they may have become “too big.” Success has rewards, but we all know what happened to Microsoft nearly 20 years ago when the U.S. government decided to look into Microsoft as a monopoly. The Department of Justice looked at Mr. Softie as a “bad guy,” and the tech meltdown quickly followed in March of 2000. While that is not likely to happen today with the FANG stocks, the similarities are clearly in place in our current market of 2018.

Stocks look good for the time being, though, especially with this past week’s amazing bounce. It is rare to get a 10% “correction,” and a 5% or so rally in a matter of days. That’s Wall Street, and it never fails to do what it is not supposed to do. The Gorilla wishes each and all a relaxing winter weekend, and we will be back in action on Monday!

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