Markets Stall But for How Long? Not Long

Published on February 26, 2019 @ 12:57pm

A gap up and a reversal yesterday may suggest these markets are finally on the verge of doing some backing and filling. In other words, now that all  of the major indices are back up around levels not seen since last October, they do have every right to stage at least a bit of a correction after a parabolic run that has literally lasted two months to the day.

It doesn't mean our long-term bullish stance is changing, but it does mean these markets may finally start pulling back on a short-term basis again. However, it's definitely going to take more than just a couple of days of weakness if we're going to be convinced the short-term trend has actually changed.

We've seen these markets stage a few days of weakness on several occasions over the last few months, only for them to buck that weakness and continue to move higher. As a matter of fact, there were a few occasions whereby major index short interest was abnormally high, but that didn't end up mattering as short sellers still ended up having to cover - adding even more fuel to the recent rally.

With that, provided here are daily charts of both the S&P 500 and the NASDAQ Composite. As you can see, while the S&P 500 has now found its way back up around its mid-October high, the NASDAQ Composite has yet to do so. Further, although the S&P 500 has finally retraced a perfect .79 retracement (blue horizontal line) from last October's high to its late December bottom, the NASDAQ Composite has yet to do so.

What's the takeaway here? While our near-term targets of 2,881 on the S&P 500 and 7,734 on the NASDAQ Composite are still technically in the cards, so is the possibility of a reversal right around current levels. There's no question these markets have defied gravity - making every fundamental bear out there look pretty bad for months now - so a pullback is most certainly logical at this point.

How much of a pullback is obviously the bigger question right now, but when we consider the breadth and strength of the recent rally, one can make a pretty strong argument that any potential selloff may not be as ugly as most might think.

We'll see, but there's plenty of technical and fundamental tailwinds out there to potentially take these markets much higher. And, considering there's still enough psychological damage out there brewing from late last year, that's just one more reason these markets could simply continue to climb a wall of worry.

Rates still aren't an issue and likely won't be for a very long time, so that continues to give these markets at least one fundamental reasons to continue to move higher when it's all said and done. Add that to any potential positive trade news coming from Asia over the next few weeks and we have a psychological recipe for more upside ahead.

Tomorrow before the open, we've got one of our current open ideas set to report their quarterly numbers in The AES Corporation (AES). The mid-cap utility and global renewable energy provider is expected to report earnings of $.33 cents per share on revenue of $3.5B.

For what it's worth, AES Management has managed to beat earnings expectations three of the last four quarters - with a 16% beat its last reporting period. In this current market environment anything is possible from a trading perspective, but there's no question shares of AES have continued to find momentum week after week, so we'll look for another leg up as soon as tomorrow.

The bottom line is regardless of what happens tomorrow before the bell, we'll continue to stick with AES and look for much higher levels down the road - especially with emerging markets finally starting to look attractive again.