Well, there’s no question that there will be a lot of news today…so it will be interesting to see if any of it (or if all of it combined) will create a measurable move in the stock market. We get the President’s address…where he will spell-out the specifics of his new tax proposals. Before that, however, we get the announcement from the Fed…and the Chairman’s press conference. Finally, we get some key earnings reports from some very important mega-cap tech names after the close.
The announcement of the President’s tax proposals is unlikely to be a big market mover. Most of the new broad proposals have already been made public, so the real impact will come later…when we get a better idea of what will actually be passed into law. That will take some time….……There are also reasons to believe that Chairman Powell’s comments won’t have a big impact either. If he was going to change his tone in a meaningful way, other members would have almost certainly laid the ground work with some public comments in advance of today’s announcement.
However, we will still note that bond yields are starting to creep higher once again. As we have been saying since mid-March, the Treasury market had become extremely oversold (in price…and thus extremely overbought in yield)…and therefore it was due for a multi-week pull-back in long-term rates. Now that this technical condition has been worked-off, rates seem to be headed higher once again. The move back above 1.6% is not a compelling one yet for the stock market. It will likely take a move back towards the March highs (of 1.7%) to create some meaningful headwinds, but it should still be strong enough to quickly help the bank stocks resume the strong rally that began at the end of last summer.
However, we don’t want to limit our comments on the banks to the ones on this side of the Atlantic. The European banks have been rallying strongly for many months as well. In fact, with the yield on the 10yr German bund trading at new highs for the year this morning, the European banks just might have more upside potential than the U.S. banks as we move through the rest of the 2nd quarter. The STOXX Europe 600 Banks Index is bumping up against its March highs this morning, so if it can break above that level in any significant way, it’s going to be very bullish for the European bank stocks on a technical basis. Therefore, even though we remain very bullish on the U.S. bank names, we think that investors should also be looking across the pond for some further gains in the financial sector in the weeks and months ahead. (First two charts below.)
As for the mega-cap tech stocks, tonight’s reports out of Facebook (FB) and Apple (AAPL) should be particularly important. These stocks have been dead money for 7+ months now. Therefore, even though they are great companies, their stocks have been a drag on the performance of many large institutional owners for a while now. If they cannot see better performance soon, these big institutions will have no choice but to pare-back the size of their holdings. No, they won’t sell them whole sale, but for institutions, theirs is a performance game…that is measured each and every year. Thus, no matter how much they like these companies, they cannot remain overweighted in these names forever…if they continue to underperform the broad stock market.
Having said this, if stocks like FB and AAPL can breakout…it will attract money from another type of big investor who have already pared-back some of their holdings in these names. We’re talking about the momentum players…who run A LOT of money now-a-days. If these stocks can regain their upside momentum that they had for a long time before last September, these stocks should rally quite strongly.
For Facebook, if tonight’s earning report is enough to get the stock to move above the April highs of $314, it should be VERY bullish. The stock had already broken out of its multi-month sideways range a couple of weeks ago , BUT only slightly so. (It can also be seen as breaking above the top line of an “descending triangle” pattern.)……It then pulled-back to the top of that old range. However, it has not fallen back into that range. Therefore, if it can bounce from here…and take-out those early April highs, it will confirm the breakout in FB…which should help it run a lot higher over the coming weeks. (Third chart below.)
As for AAPL, the stock is sitting at a critical level on a technical basis. If their earnings report causes the stock to fall in any serious manner, it’s going to raise the odds that AAPL has formed a “Head & shoulders” pattern. “H&S” patterns are classic indicators of a change in trend, so if AAPL rolls-over in the coming days/weeks, it’s going to be rather bearish. HOWEVER, if the earnings report is positive enough to give AAPL a big boost…and lead it to break to a new all-time high (above its January highs of $143)…it’s going to attract those momentum players very quickly. THAT will be very, very bullish for the stock. (Fourth chart below.)
One last comment about a large cap tech name. We’d just like to highlight that Seagate (STX) has become extremely overbought. Its daily RSI chart has reached 85…and its weekly RSI reading has moved above 86! That reading is the most overbought reading since the company went public again back in 2003!!!.......No stock moves in a straight line…and this one is getting ripe for a pull-back (no matter how good its long-term fundamental picture might be). (Fifth chart below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.