The S&P 500 declined 0.3% on Tuesday. In this environment, that qualifies as a "big" drop, so, naturally, the rush is on to buy the dip this morning. The S&P futures are up nine points, the Nasdaq 100 futures are up 26 points, and the Dow Jones Industrial Average futures are up 94 points.
The ostensible catalyst for the bullish bias is the Senate's approval of the tax bill, which happened by way of a 51-48 party-line vote. The House voted in favor of the tax bill yesterday, but because of a procedural snag that ran afoul of Senate budget rules, the House will have to hold a do-over vote today.
By and large, the votes in the House and Senate on the tax bill were formalities. A lot of leaked insight ahead of those votes made it essentially clear that the tax bill approval was going to happen, which is why it's an overstatement to tie this morning's bullish bias directly to the approval in the Senate.
Nevertheless, removing any last shred of doubt hasn't hurt matters, which the bulls have taken into their hands all year.
They don't appear ready to let go either, not with the understanding that this is typically a seasonally favorable period for the stock market (even when something like tax reform is not part of the picture).
To put it bluntly, this stock market is the playground of the bulls right now who will aim to exploit the seasonality factor, the momentum trade, and sidelined investors' fear of missing out on further gains.
Their eagerness to do so has been fueled by encouraging economic data and good earnings news.
More fuel has been added to their fire, too, with the better-than-expected earnings reports and upbeat outlooks provided by FedEx (FDX) and Micron (MU). Those stocks are up 2.0% and 6.4%, respectively, in pre-market trading.
Those reports have as much to do with the bullish bias this morning in the futures market as anything else, because their favorable outlooks have validated the earnings enthusiasm that has been wrapped up in stretched valuations. In other words, they haven't created any real sense for the bulls that the market's stretched valuation is unjustified.
The Treasury market could potentially do that if long-term rates spike. They had an interesting pop yesterday that caught the attention of market participants and long-term rates are still leaking this morning.
The yield on the 10-yr note is up three basis points to 2.49%, leaving it one basis point higher than where it started the year. An initial pop in long-term rates, however, doesn't necessarily have to be the undoing of the stock market.
That's because it is likely rooted in a risk-on demeanor, whereby stocks benefit at the expense of Treasuries in an asset reallocation trade. In that vein, one is able to reconcile the strength in the equity futures market this morning with the ongoing weakness in the Treasury market.
At some point, rising long-term rates will stand in the way of the stock market, but for now, they reflect a burgeoning appreciation for the enduring pickup in economic activity that has been repressed in the Treasury market by the weight of an interest rate differential trade.
As a reminder, the Existing Home Sales report for November (Briefing.com consensus 5.56 million) will be released at 10:00 a.m. ET. It is expected to follow form with the growth pickup narrative as economists are expecting to see a pickup in sales versus October.