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A ‘magic bullet’ is about to push U.S. stocks higher
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Loading...Long and strong.
That has been the playbook for the aggressive speculator whose mantra is "trading in the now."
While many investors are skeptical of the three-month stock market rally, it is to be noted that the Trump administration's initiatives of a corporate tax cut and deregulation are about as close to a magic bullet for equities as it gets.
And magic bullets of the fundamental sort tend to have a larger effect on stocks than most believe. For this reason, it is better to set the crystal ball aside and simply let the market tell its own story.
When stocks have fully discounted the perceived benefits of administration policies, the averages and individual stock leaders will “speak.” They will fall. Until they do, trying to predict when they will is folly.
For the momentum player who likes to hold a winner for several weeks to several months, he must at all times be aware of the market's leadership, both its identity and its action.
In this case, while investors continue to price in administration policies perceived to benefit heavy construction, banks, brokers, transports, industrials, etc., the real leadership since New Year's Day has been the large-capitalization growth VONG, +0.38% and technology XLK, +0.33% sectors. The chart, below, particularly the upward slope of its relative strength line, illustrates this.
Currently, the takeaway from any analysis of leadership is that market participants harbor a risk-on mentality conducive to higher prices. The outperformance of growth names tells you this. At the same time, there is a distinct preference for larger issues, which is part and parcel of a mature bull market.
The sectors that initially melted up beginning just prior to the November election, e.g. small-capitalization IWM, +0.20% transports IYT, -0.33% and financials XLF, +1.29% are all backing and filling, also known as basing, for the past two months. That profit-taking in these segments has been muted speaks of the market's solid underlying foundation.
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