"Tax reform means, 'Don't tax you, don't tax me. Tax that fellow behind the tree."
--Russell B. Long
The market has enjoyed its best two-day rally of the year but now it is faced with several news events and some technical resistance that could slow down the momentum.
Since March 1, market players struggled with an indifferent market that couldn't produce a sustained move in either direction. The bears threatened to take out support but were unable to close the deal, and each time the bulls made a run it fizzled out the next day.
That changed on Monday following the French presidential election, although some folks viewed it as a rather feeble excuse for such explosive buying. The bulls cemented the change in market character when they chased things higher following strong earnings reports from several Dow Jones Industrial Average stocks, including DuPont (DD) and McDonald's (MCD) .
The big question now is whether the market can build on this momentum. The biggest positive the bulls have going for them is that they now have the advantage of a strong move on which they can build further. Strong markets tend to stay sticky to the upside as underinvested bulls try to put more capital to work and bears are squeezed. If you missed this move you are likely looking for entry points on pullbacks, and that is what produces underlying support.
Of course, the bears will be looking for reasons why this rally can't continue. Technically speaking, the S&P 500 and DJIA still face overhead resistance at the March 1 high. The Nasdaq and Nasdaq 100 have blasted to new all-time highs but the other major indices still have not overcome that hurdle. Technicians will be looking for stalling at these levels.
The other obstacle the bears will be focused on is the news flow. The pessimists have been hoping that disappointment over Trump fiscal policy accomplishments would be the catalyst for a breakdown, but it never quite happened despite the failure of the Obamacare repeal.
At 1.30 p.m. ET today, Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn will present what President Trump has promised is the biggest tax cut ever. There are already many doubts that Congress is going to agree to a bill that further increases the deficit, but talk of 15% rates and bringing capital back from overseas has been driving the market for a while.
The first thing that comes to the minds of traders when they consider this setup is "sell the news." This is a much-anticipated event and is coming on the heels of a big rally.There is no way everyone is going to be pleased with the tax policy and it will face many obstacles along the way.
That is a classic "sell the news" setup, but one thing we have learned over the years from numerous Fed announcements is that "sell the news" is never that simple. The market repeatedly has rallied even further on much-anticipated positive news from the Fed or about economy. Perhaps it is due to the dominance of computer algorithms these days, but the simple logic of selling into anticipated news hasn't worked that well for a long time.
In addition to the tax policy announcement, there is also the potential for a government shutdown this weekend. However, President Trump backed down on his demand for funds to build a Mexican wall and that has decreased the risk of an impasse.
The bulls have the momentum and the bears have a "sell the news" setup and some technical resistance, but traders are likely thinking "buy the dips" following a big run. My money is on continuation of the uptrend even if there is a hiccup following the tax reform announcement.