Need to Know: The U.S. stock market melt-up has room to move higher, MKM says

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U.S. stocks climbed to record highs on Friday on rising hopes of a trade agreement between the U.S. and China. The Dow Jones Industrial Average DJIA, +0.80% closed above 28,000 for the first time ever, while the S&P 500 SPX, +0.95% index hit its fourth consecutive record close.

Negotiators on both sides have ensured the positivity continued over the weekend and reports suggest the U.S. will extend a license for companies to keep doing business with Huawei, the telecoms equipment company. Dow futures YM00, +0.32%   moved higher on Monday, indicating fresh records on Wall Street.

The bullish sentiment could be here to stay, according to MKM Partners, in our call of the day.

Chief market technician JC O’Hara said that despite continued highs, market conditions were still conducive for equity exposure.

“The melt-up continues. While the market has entered ‘overbought’ territory, we are not seeing any intensity from bears at this moment. While an overbought pullback is always a possibility, we continue to like the intermediate-term prospects for equities,” he said.

Sentiment and exposures had improved but were not extreme, he said, and the market is not saturated and can handle additional money inflows.

O’Hara added that the latest put-call ratio — widely used to gauge investor sentiment — was nearing ‘greed’, a territory that often coincides with short-term market peaks.

“The last time this ratio was this low was February 2019. The market took a brief pause before it ultimately continued higher.”

MKM favored large-caps over small-caps and said midcaps were right on the verge of breaking out. It cited “great opportunities” in health-care stocks as the NYSE Healthcare Index broke through to new highs last week.

The market

After the Dow Jones Industrial Average and the S&P 500 hit record highs on Friday, Dow futures are up 0.2%, S&P 500 futures ES00, +0.21%   are up 0.1%, while Nasdaq NQ00, +0.31%   futures are also higher. Asian stocks ADOW, +0.57%   climbed overnight as investors closely monitored trade-war updates, and European markets SXXP, +0.26%  edged higher in early trading.

The tweet

The buzz

China’s central bank on Monday lowered the interest rate on its regular reverse repurchase open market operations for the first time since October 2015, aiming to boost market confidence and prop up slowing growth. It also injected 180 billion yuan ($25.68 billion) into the monetary system.

The U.S. and China had “constructive talks” on trade in a high-level phone call on Saturday, according to Chinese state media agency Xinhua.

The Trump administration is expected to grant a 90-day license extension to allow U.S. companies to continue doing business with Huawei.

Exchange operators Euronext ENX, +1.25%  and Six Group are set to go head-to-head in a battle for control of Spain’s national stock exchange Bolsas y Mercados Españoles BME, +37.40%.

Saudi Aramco’s highly anticipated IPO will value the state oil giant at up to $1.7 trillion, the company said on Sunday, falling short of the initial $2 trillion target. It is still set to be the world’s largest ever IPO.

Computer group HP HPQ, +0.25%   said its board has rejected a $33.5 billion takeover offer from Xerox XRX, +0.75%. HP said it recognizes the potential benefits of consolidation and was open to exploring other options to combine with Xerox.

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