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Trump just scored two big wins on trade — but here's why stocks may still tank

Brian Sozzi
Editor-at-Large

Here comes a short-term top in the market, perhaps.

With President Trump scoring two big trades deal this week (USMCA and the phase one trade deal with China), investors will be eager to find another catalyst to send stocks even higher. But those hunting for positive catalysts may come up empty as Corporate America takes a cautious stance with their initial 2020 profit guidance this earnings season amid lingering geopolitical uncertainties.

Meanwhile, the Federal Reserve’e first meeting of the year later this month could be a snooze-fest if one reads the tea leaves of comments from Fed members in January. The Fed will probably stay data dependent as it said throughout 2019 - and that suggests no interest rate hikes or rate cuts for now.

That said, let the cries on Wall Street for a pullback in red-hot equities markets commence as investors return from their search disappointed.

“We have gone now for over a year without a correction of any real meaning. So we are due for one, that’s a normal development for markets,” Brown Brothers Harriman chief investment strategist Scott Clemons said on Yahoo Finance’s The First Trade. “We have told our clients there will inevitably be the 5% — or 10% —pullback over the course of this year because things are overbought at least here in the U.S.”

Calling stocks overbought may be an understatement.

More than 85% of stocks in the S&P 500 are now above their 200-day moving averages, the most in five years, according to Sundial Capital Research. Within the Nasdaq 100, an average of 22% of the stocks have hit news and become overbought with a relative strength index above 70. When this dynamic has happened going back to 2001, Sundial has found the Nasdaq 100 tends to underperform in the coming weeks.

And one final sweetener for the permabulls from the folks at Sundial. There is a 15-year high in stocks with negative earnings, both established companies and new issues. That suggests investors are simply chasing momentum, and could be negatively surprised when new data presents a different story.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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