On Wednesday, the market celebrated earnings that exceeded low expectations and a Fed that totally reversed the hawkish stance it held two months ago. The big question now is whether the market can build on this positive reaction and keep the uptrend running.
Market players were not expecting much from earnings this quarter, and after negative responses from key stocks like Netflix (NFLX) and Intel (INTC) , that looked like the correct view. But expectations became too low. That set the stage for Apple (AAPL) to surge on a report that was in-line, at best, and is helping Facebook (FB) jump higher Thursday morning.
Facebook is particularly interesting, as it has been hit with constant criticism on privacy issues and its lack of transparency, but that obviously has not impacted its appeal as an advertising vehicle. No one else can offer an audience like Facebook -- and that is evident from its strong report Wednesday night.
While low expectations have set up some good upside for companies like Apple and Facebook, the big issue is whether this will now lead to a steady uptrend from here. Typically momentum is produced when already high expectations are consistently exceeded. Both Apple and Facebook did that for many years, but now the dynamic has shifted, particularly for Apple, and the headlines keep using the phrase "Earnings are Better Than Feared."
We will see how willing market players are to chase these stocks higher after earnings that wouldn't have received such a positive response in a different environment. However, one positive that the bulls have going for them now is that the Fed is now fully committed to the dovish cause.
On Wednesday, Jerome Powell completed a remarkable reversal in the policy of the Fed and has cemented a dovish view. Just a few months ago, the market was struggling with the potential for three or more rate hikes at a time when economies around the world -- China in particular -- were exhibiting major economic headwinds. The disconnect between the Fed's view of the world and the market's view caused the ugly selloff in the fourth quarter.
While the Fed claims that it isn't driven by moves in the market, the Fed had little choice but to reconsider its course of action -- and ultimately seemed to decide that maybe the market was right to be worried ,and that prompted a quick change in policy.
The problem now is that the Fed is using up its ammunition. The next step is actual rate cuts, and if they move in that direction then there is going to be some real concerns about the health of the market. The Fed assures us that the economy is healthy and there are no signs of a recession, but they are not acting as if they are very optimistic.
Earnings will continue tonight with a big report from Amazon (AMZN) , but the big question now is whether this blast of good news will lead to sustained buying. The indices are running into heavy resistance as they hit the levels we last saw in early December, but the bears that keep trying to catch a reversal are providing short-squeeze fuel.
The potential for something positive on China trade will help to keep a bid under this market, but it will take a high level of conviction from the bulls to keep this momentum running.