The first few days of a new year or a new quarter often benefit from automatic inflows into mutual funds and retirement accounts. That cash is quickly put to work and helps to support the indices.
Another factor that is impacting the market on Thursday morning is that market players that wanted to avoid triggering taxable gains in 2019 are now free to take profits. Early January tax selling is well anticipated and many market players view it as a likely catalyst for a pullback after the big run that started in early October.
These two factors will affect trading in the next few days, but what is driving the market higher now is our old friends, the central banks. The People's Bank of China lowered the required levels of cash that banks must keep on hand, which has freed up the equivalent of about $115 billion in cash. That cash may eventually end up elsewhere, but the path of least resistance in the short term is stocks and bonds.
The stock market action in the last few days of 2019 was marked by positioning, tax moves and other issues that have little to do with the fundamental or technical health of individual stocks. Those reverberations continue in the new year, but will quickly settle down as the market's attention shifts to fourth-quarter earnings reports, which begin to hit in a couple of weeks.
About the same time that earnings season starts, President Trump is scheduled to sign phase one of the trade deal with China, so there will be some interesting catalysts later in the month.
In the near term, the market still is enjoying a very strong uptrend and has a strong boost from the liquidity created by the People's Bank of China. Many market players have been trying to anticipate a short-term top and are mispositioned for a gap-up to start the new year, but it will be very instructive to see if buyers can generate much additional momentum with the likelihood of some increased profit taking in stocks that had big gains in 2019.
There will be plenty of predictions about what 2020 holds for the stock market, but the course of action is to deal with what is in front of us today and not worry about what could happen months from now. The one thing I'm certain of is that there will be plenty of opportunities no matter what happens.
