I have enough data to confirm my suspicions that much of the market selling in Q4 2018 had to do with tax selling and the Fed’s projected rate hikes for 2019.

Remember, last year was a down year for markets and so there was a lot of selling and the realization of losses in Q4 2018 so as to do a tax write off for 2018 taxes. Holding on to losing positions and then selling in 2019 would mean that you’d have to pay higher taxes on money you didn’t make in 2018, and you’d have to wait an entire year until you got your 2020 tax return (for 2019 taxes) to get the benefits from your losses in 2018. That’s why the tax selling intensified in December 2018.

Both Fed rate hikes and end of year tax selling has been removed from the equation and markets are doing a lot better than they did in Q4 2018. For example, notice the high-yield debt chart.

HYG

In early October, then again in early November, and again in mid-December, we had huge moves down on HYG which pulled down the entire market. However, so far in 2019 we have not had a big move down on HYG which suggests something very different is going on in Q1 2019 than in Q4 2018.

On the daily chart of the S&P 500, notice the surging CMF.

SPX stock chart

The CMF rising while SPX chops out sideways is a positive divergence and is bullish. At the very least, we can see that what is happening on the CMF in Q1 2019, is nothing like what happened in Q4 2018.

Worries about global growth, the government shutdown hurting the credit rating of the U.S., political dead-lock in the House, China trade and a poor technical setup is keeping the buyers contained for now.

Bell-whether Intel did beat but it gave poor EPS and revenue guidance. Now you would thing that overnight futures would be flat or down after Intel’s earnings report but instead overnight futures are up.

Market breadth is still bullish with 304 stocks on the S&P 500 closing up, while 172 stocks closed down. Advancing volume on the S&P 500 was 1,485,518K while declining volume was 855,667K. On the NYSE, 1,440 stocks closed up, while 742 stocks closed down.

The support level to watch is 2600 to 2612.

SPX stock chart

Notice that the Parabolic SAR support and the 50 day MA has all converged in the 2600 – 2612 support area making this support area a psychologically significant pivot area. If the support area holds and the CMF keeps rising, this market is likely going to take another leg higher. If this support area is broken, it will embolden the bears that are mostly on the sidelines right now.

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