Stock Market Rallies Continue Setting New Records

• Stock markets have resumed their rallies after the summer sluggishness.
• The SPDR S&P 500 Trust could continue to benefit on multiple fronts.
• Donald Trump’s pro-growth agenda could get another shot in the arm once his Federal Reserve selections are finalized.

Stocks are once again moving higher as markets have resumed their rallies after the summer period that was characterized by long periods of sluggishness.  In recent weeks, there has been a good deal of debate about whether or not the election of US President Donald Trump is what actually led to all of the gains that have been seen for those trading CFDs in the SPDR S&P 500 Trust (SPY).  Of course, a conclusive answer to those questions is all-but-impossible to achieve.  

But the strength of the rally, its historical proximity to the 2016 election results, and the supportive outlook that is generated by agenda pieces like tax reform and infrastructure rebuilding combine to suggest that investors are reacting Trump’s strategy course (and that those results are favorable).  In the weeks ahead, we could see additional impulse rallies in the SPY ETF if Donald Trump selects a Federal Reserve leader that is reluctant to aggressively rate interest rate levels.  This supports the outlook for CALL options strategies in the SPY at current levels.

On a year-to-date basis, the SPY ETF has posted gains of 15.3%.  Earnings have been largely supportive in many sectors but the real catalysts have been seen in the macro phenomena that have characterized the period.  On several occasions, the current Fed Chair Janet Yellen has made suggestions that broad uncertainties within the economy (and within the policy agenda pieces promoted by President Trump) have made it difficult to normalize interest rate policy in line with historical trends.  The ultimate result here has been cheap credit and improved consumer spending habits that have supported the outlook for corporate earnings into the final parts of this year.

So the real question here is whether or not these trends will continue within the financial environment, and the answer to that question could be seen near-term once Donald Trump makes clear which economist will be leading the Federal Reserve.  Of the likely possibilities, John Taylor has the strongest history of hawkish rhetoric so a selection here could catch markets by surprise and make rallies in the SPY ETF difficult as we head into the final parts of this year.  Janet Yellen has kept her foot on the brake on many occasions and it is now looking as though markets will need to see a continuance of this (in the selection of Jerome Powell) in order to keep this bullish train moving forward.

The second-largest holding in the SPY ETF is Microsoft Corp, which has been surging over the last several quarters as improvements in its cloud infrastructure have led to a series of strong earnings reports.  The stock makes up 2.75% of the total values seen in the ETF and given the strength of the recent earnings performances in the tech sector as a whole, rallies here could continue to be supportive of the larger fund collectives going forward.  In the monthly chart above, we can see that the bullish momentum here is undeniable and since the tech space is an area that is generally not as vulnerable to hawkish changes in interest rates, there is little reason to believe that these trends will be ending in the near-term.  

Readings in the Commodity Channel Index are bullish but holding at overbought levels, which is suggestive of a period of consolidation without a macro catalyst to drive prices higher.  This could come if a name like Jerome Powell is selected as Fed Chair, as the rising tide lifts all boats in the SPY fleet.  At this stage, there is very little reason to expect declines (barring a major surprise in the coming Fed appointments).  But with the SPY ETF still trading at record highs, the conservative bet is to use CALL options as a means for expressing that bullishness.