Short-term Summary

Over the past week, all major indexes (S&P 500, Dow Jones Industrial Average, S&P Mid Cap 400, S&P Small Cap 600, Nasdaq Composite, and Russell 2000) were able to break out to new highs. The S&P 500 gained 1.7% during the week and is now up 2.6% since its breakout on 9/11. Also, relative strength of the S&P equal weight index, as well as the mid and small caps, improved during the advance. This is a positive development in terms of market breadth and strength beneath the surface.

Largely contributing to the market’s strength recently has been optimism on the potential for tax cuts. The latest update is that the House passed its budget resolution for fiscal 2018 today, incorporating language that would allow a tax bill to pass through the simple-majority reconciliation method. The next step is for the Senate Budget Committee to begin its process, with a vote in the full Senate expected within the next couple weeks.

3Q earnings season will begin soon, and S&P 500 estimates now suggest growth of 3.2% for the quarter. For the full year, earnings estimates could be the most stable since 2011 and, on a growth rate of ~10%, remain supportive of equity markets. Valuation remains lofty with the S&P 500 trading at a P/E of 19.5x, which is at the upper end of this year’s 18.9-19.6x range. Current valuations are supported by the low inflationary/low interest rate environment, accompanied by strong earnings growth and stable estimate revisions. However, moving forward, we believe that valuations are unlikely to expand much without favorable tax reform or better economic growth.
Technical: On 9/11/17, the S&P 500 broke out of an Ascending Triangle Pattern. The breakout suggests an upside objective near 2556, just above current price levels. We suggest looking for initial support (should a pullback develop) near 2508, where it formed a small base near the end of September. We would then look for the next level of support near its 50 DMA, which lines up with horizontal support at the 9/11/17 breakout point.

In sum: We believe that potential upside and downside price action is likely limited for the short term, but the path of tax changes will remain a significant influence. Given the solid (and improving) economic and earnings backdrop, we would use any potential pullbacks as buying opportunities.


Survey data continues to be strong both domestically and globally. US ISM manufacturing rose to 60.8 in September, breaking out to its highest reading since 2004. Similarly, US non-manufacturing ISM also surged to 59.8 in November, breaking out to its highest reading since 2005. While some of the strength is likely attributed to hurricane effects, the readings remain solidly above their averages of 51.5 and 54.9, respectively, from last year. These strong readings are also taking place globally. For example, China’s manufacturing and non-manufacturing PMI both rose to multi-year highs in September. While actual economic output has yet to be as strong as the survey data has implied, these readings nevertheless reflect momentum for domestic and global economic activity.

Economic data reported in the past week (actual vs estimate):

Personal Income (Aug): 0.2% vs 0.2%, 0.3% prior
Personal Spending (Aug): 0.1% vs 0.1%, 0.3% prior
PCE Core m/m (Aug): 0.1% vs 0.2%, 0.1% prior
PCE Core y/y (Aug): 1.3% vs 1.4%, 1.4% prior
Chicago PMI (Sep): 65.2 vs 58.7, 58.9 prior
U of Michigan Sentiment (Sep F): 95.1 vs 95.3, 95.3 prior
Markit US Manufacturing PMI (Sep F): 53.1 vs 53.0, 53.0 prior
ISM Manufacturing (Sep): 60.8 vs 58.1, 58.8 prior
Construction Spending m/m (Aug): 0.5% vs 0.4%, -1.2% prior
ADP Employment Change (Sep): 135k vs 135k, 228k prior
Markit US Composite PMI (Sep F): 54.8 vs 54.6 prior
Markit US Services PMI (Sep F): 55.3 vs 55.1, 55.1 prior
ISM Non-Manf. Composite (Sep): 59.8 vs 55.5, 55.3 prior
Initial Jobless Claims (Week): 260k vs 265k, 272k prior
Trade Balance (Aug): -$42.4B vs -$42.7B, -$43.6B prior
Factory Orders (Aug): 1.2% vs 1.0%, -3.3% prior
Durable Goods Orders (Aug F): 2.0% vs 1.7%, 1.7% prior
Durables ex Transportation (Aug F): 0.5% vs 0.2% prior


Manufacturing PMI (Sep): 52.4 vs 51.6, 51.7 prior
Non-manufacturing PMI (Sep): 55.4 vs 53.4
Caixin China PMI Manufacturing (Sep): 51.0 vs 51.5, 51.6 prior

Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy

Disclaimers and Disclosures

Investing Risks:  The risk of loss from investing in securities (stocks, ETFs, mutual funds, etc.), bonds, options, futures, and forex or related products, can be substantial.  Investors must consider all relevant risk factors, including their own personal financial situation, before investing.

Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities.  

Options Risks:  Options involve risk and are not suitable for everyone.  Options trading privileges are granted at the account level by your custodial broker and are subject to review and approval.  Not all account holders will qualify.  Before trading options, a person must receive a copy of Characteristics and Risks of Standardized Options. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which can be found on our website  Copies may be obtained by contacting your broker or the Options Clearing Corporation.

Spreads, Straddles, Strangles, and other multi-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.  These are advance option strategies and often involve greater risk, and more complex risk than basic options trades.  

Portfolio Margin:  A portfolio margin account generally permits greater leverage in an account, and greater leverage has the potential to create greater losses in the event of adverse market movements.  Portfolio Margin, or Risk-Based Margin, is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “security class” or “product group” as determined by the custodial broker’s theoretical pricing model using multiple pricing scenarios.  These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model.  Clients participating in portfolio margin will be required to sign an agreement acknowledging that their security positions and property in the portfolio margin account will be subject to the client protection provisions of Rule 15c-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.  Clients will be subject to minimum equity requirements by not only the custodial broker but also the managing firm.

General Disclosures:  Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.

Investors should carefully consider the investment objectives, risks, charges, and expenses before investing in any investment product.  To obtain a prospectus containing this type of information as well as other important information, contact your custodial broker.  Please read the prospectus carefully before investing.  

You should discuss any/all implications of investing in such products with your custodial broker, financial adviser/advisor, and/or tax advisor.  Past performance is not indicative of future results.  

Third Party Information:  This presentation may utilize or refer to third party data.  In such a case, let it be known that MSCM, LLC. does not control, nor has it developed the content being referred to, and does not make any warranty, express or implied, as to the accuracy, usefulness, timeliness or even the continued availability or existence of said information/content created or maintained by others.  Opinions expressed by others are not necessarily those of MSCM, LLC., nor does MSCM, LLC. endorse, warrant, or guarantee products, services or information described or offered by such firms.