You know that saying, "The trend is your friend?" Well, it pretty much ended up being the basis for Monday's broad-based rally, which was forged on no news of note other than the stock market's continued resilience to selling interest.
The expectation that the market is due for a pullback continues to get dashed. The price action, though, is looking increasingly speculative and is pushing up against some fundamental boundaries that should seemingly invite some pushback.
The S&P 500 is up 15.9% from its December 24 low and is now trading at 15.8x forward twelve-month earnings, which have been coming down as stock prices have been going up. It's otherwise referred to as multiple expansion, which happens in rose-colored periods like the one we are in now.
Bad news is good news, because it keeps the Fed (and other central banks) on the sidelines -- or perhaps more involved with easier monetary policy.
Disappointing quarterly guidance, meanwhile, gets dismissed in favor of the pickup that is expected in the second half of the year (see the semiconductor stocks for this trading dynamic at work).
Trade deals get worked out and everyone goes home happy.
The price action has supported this psychological orientation, which is why the price action will be the guide to when the trend is done being a trader's friend.
Today will be interesting in that regard. Alphabet (GOOG) is down 1.3% after reporting fourth quarter results that were not above reproach. To that end, Alphabet's operating margins were down year-over-year, as were cost-per-clicks. That was enough to spur some profit taking after a 17% gain from the December 24 low.
The interesting connection in terms of Alphabet's report, and the subsequent selling pressure, is that it has not unnerved the futures market.
The S&P futures are up six points, the Nasdaq 100 futures are up 29 points, and the Dow Jones Industrial Average futures are up 100 points. That leaves them all a little above fair value, creating an expectation that the market will once again show resilience to selling efforts.
That's the interesting thing to consider today, because it is a pivot from the prevailing expectation that the market is due for a pullback. Now, there is an underlying sense that this market will beat back selling interest again and stay on trend, which can invite some chasing action.
Oftentimes, that is about the time the trend stops being the friend one has come to count on. Today's price action, therefore, will be interesting to watch as the S&P 500's 200-day moving average (2741.71) is in sight.
Also in sight is a slate of final Services PMI readings for January out of the eurozone that were less than impressive and which have preceded the release of the ISM Non-Manufacturing Index for January (Briefing.com consensus 57.0; Prior 57.6) at 10:00 a.m. ET.
That report will be of added interest to the market, along with tonight's State of the Union speech from President Trump.
The latter could provide a trading catalyst on Wednesday, but for now, the price action trend is the trading catalyst that everyone is waiting to see if it stops being so friendly.