• The last time the S&P 500 index saw a start as strong as this year was 1991.  With a gain of over 9% YTD, it is the eighth best start in the index’s history.  Looking at similar periods, the median return for the remainder of the year was 8% (source:  Bespoke Investment Group).


  • Everyone gets a trophy this earnings season-or at least a pass. Companies that reported upside surprises for Q4 saw their share prices rise 2% on average that day.  Those that missed estimates barely moved (source:  FactSet).

Will This Rally Fade Like Early 2018?

We also saw a strong start last year with the S&P 500 up 7% at the then all-time high on January 26th.  The surge out of the gates was followed by 10% and 19% corrections later in the year.  Are we in for a similar fate this year after such a strong start?  Let’s look at a few market pillars and why we conclude this year appears to be different:

Valuation – The forward P/E for the S&P 500 in January 2018 was over 18x, dropped to 13x in December, and now stands at 15.8x.  This is lower than the five-year average and slightly higher than the ten-year average.  As we showed in the earlier February commentary, stocks have retraced back to the long term earnings trend line.  Stocks appear fairly priced at these levels.

Sentiment – The well-known and respected AAII survey shows bullish sentiment about 40%, right at the historical average.  However, bearish sentiment is well below the historical average of 30% at 23%.  Investors have been turning more bullish since the December low but are not overly optimistic like they were a year ago.

The CNN Fear/Greed Index is showing a moderate Greed rating, up from Fear just a month ago.  Last year the January high was accompanied by extreme Greed, as well as at the subsequent September 2018 all-time high.

Technical – Not all the technical damage to the market has been repaired, but the price chart (a supply/demand indication) is looking much better.  (For a review of technical analysis, see the December 2018 Market Commentary at  https://mailchi.mp/45dd75abe6a8/2ll24qleyd-2884001).  The S&P 500 is now comfortably above the 50-day moving average but is bumping up against resistance at the 200-day moving average.  A break above that level could lead to a retest of the all-time high, about 7% above current levels. 


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