Market Direction Week of February 19, 2018©

Market Direction:BULLISH alert issued 2/15/2018

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Last Week Review: Stocks carried over the momentum they had recaptured the previous Friday and recorded their best weekly gain since early 2013. The technology-heavy Nasdaq Composite performed best, helped by solid gains in the stocks of Apple and networking equipment maker Cisco Systems. Along with information technology, the financials, health care, and industrials and business services sectors also outperformed within the S&P 500 Index, while energy shares lagged despite a sharp rally in oil prices on Wednesday. Having entered correction territory—or a decline of 10% or more off recent peaks—the previous week, the indexes ended Friday with gains for the year to date and only 4% to 5% off their January highs.

Eurozone GDP increased by +0.6% in Q4; Germany & Italy contracted but were offset by expansions in The Netherlands and Portugal. Separately, despite a -10.1% correction in the SPX, the Eurozone’s widely watched Stoxx 600 index fell only about -8.0% before the recovery began. Separately, the dollar has fallen to its lowest level versus the euro, since December 2014.

This week a Treasury department report indicated that in 2017, China increased its holdings in US Treasuries by the largest amount since 2010. With a $126.5B increase, China now holds $1.18T. Separately, the dollar has fallen to its lowest level versus the yen, since November 2016.

How the market finished last week, the S&P 500 up 4.3%, the Nasdaq up 5.3%, and the Dow up 4.3%.

This Week: Q4 earnings season is winding down now. With 396 companies (79%) of the S&P 500 having reported so far.

My main concern now is that perhaps the rebound is going too well. If this recovery doesn’t slow down, at the current trajectory the SPX will be back to record highs by March. If that happens, it could become vulnerable to another correction.

While the volatility has settled down a bit this week, it is nowhere near levels we saw before the correction. Despite the nearly 6% rebound in the SPX, risks remain historically elevated and the possibility that the rebound has been a bit too quick is growing.

UK earnings will be the main focus next week, with a slew of big names from the FTSE reporting full-year numbers. Top of the billing will be the banks, but we also get a look at giants like IAG, InterContinental Hotels, BAE Systems and Glencore. This helps make up for the dying embers of US earnings season. In economic news we have German ZEW and IFO numbers, plus Federal Reserve (Fed) minutes, UK unemployment data and the vital flash purchasing managers index (PMI) figures from the eurozone and the US.

It promises to be a busy week, all the more so as we look to see whether the equity recovery has further to run, and whether the renewed dollar weakness will continue.

Economic Calendar: PMI Composite Flash (2/21), FOMC Minutes (2/21), Leading Indicators (2/22)

Some of the major earnings announcements on deck: WMT, BHP, DPZ, HD, VRSK.

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