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Weekly Market Guide | Markets Short-Term Summary
By: Raymond James Financial | January 17, 2020

Short-Term Summary

With the phase one trade deal signed and Iran tensions subsiding, investor focus is likely to shift toward earnings season as the most significant catalyst for stocks in the coming weeks.

The market advance has continued and momentum remains strong. The small caps broke out today and could see outperformance (vs the Large caps) as they are generally less extended than the large caps. So while the bullish undertone to the market remains, we would be selective with new purchases as the S&P 500 is extended. The index has not experienced a 1% daily move in three months, investor complacency has set in (put/call ratio and VIX low), and valuation multiples have expanded to elevated levels. As such, we would not be surprised to see a "pause" or consolidation in the short term.

That said, the intermediate term technical backdrop remains solid, and contributes to our view that pullbacks are likely to be light. We view initial technical support at 3260, followed by the upward trending 50 day moving average at 3172 (-4% from current levels).

The banks "kicked off" earnings season with generally supportive results thus far, however the group has continued to consolidate its relative strength. The move lower in interest rates in recent days being the headwind. We remain overweight the Financials sector, and would use the pullback as an opportunity to accumulate.

The energy sector continues to hold up relatively well, while WTI crude oil prices have pulled in. The sector is now oversold in the short term and trades just above its 200 DMA. Schlumberger reports tomorrow morning, beginning results for the services names (followed by Halliburton next Tuesday). We are interested to hear from these companies, as positive reactions could be the next catalyst for a potential upturn in the Energy sector.

The technology sector will be another key area to watch, as the group has gotten extended in price (18% above its 200 DMA- a two standard deviation move over the past 10 years). Valuation multiples have expanded considerably over the past year, so it will be important for these companies to meet or exceed expectations in their results, in our view.

Also, the consumer discretionary and industrials sectors have lagged lately, despite the risk-on market tone. Q4 earnings estimate revisions have been worse than Q1-Q3, which has likely weighed on relative performance trends. However, this could end up providing a "low bar" for results given our expectation of a solid consumer and improved manufacturing trends in 2020.

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