Dear friends and clients,
Here are my latest thought on the markets for your review.
Clues to the markets next move. Are stocks overbought and due for a pause or can the upward momentum continue?
I believe 4 things hold the key:
- Next move for price in crude oil
- Strength of the dollar
- Whether FED intends on raising rate in June
- 1st qtr. earnings results
I believe the market seems a bit overbought after big pricegains without much of a pullback, so the market may need to consolidate thesegains. The market may stay range bound between 1900 and 2100, until earningsrecover and liquidity improves. There are a few things I am watching that couldbe clues to the next move in the market.
- If oil can stay above $35 per barrel, this canbe bullish for energy and risk assets.
- The US dollar in my opinion is the mostimportant factor and its direction. The dollar peaked in January just as the marketwas making its lows since then the dollar has declined and the market hasrallied.
- The relationship between the Fed and the dollaris key for the markets. It seems the probability of a fed rate hike in June islow.
- The market is betting that the Fed will notraise rates so the markets and financial conditions have improved and this willhelp risk assets. The relationship between the SP500 vs 10yr treasuries isdiverging. This bears watching because as the SP500 has rallied the 10yr yieldshas been dropping. If this continues this could signal that stocks may beoverpriced or treasury yields are too low and heading higher.
- It’s also important to keep a perspective thathigher inflation due to strong labor markets and the FEDS response can be aheadwind for bond investors but can reward stock investors with stable growthand earnings.
Earnings – The Consensus EPS for 2016 growth isonly 2.3% but a rally in crude oil of 50% and a weak dollar are creating atailwind for earnings estimates. This inmy opinion sets up for earnings surprises to the upside and can lead to themarkets momentum and market new highs in the months ahead.
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