Market Direction Week of December 3, 2018©

Market Direction:BEARISH alert issued 11/23/2018 

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Last Week Review: U.S. stocks rebounded sharply this week, marking the largest weekly gain for 2018. Markets started the week on a strong footing on signs of robust U.S. consumer spending during Black Friday and Cyber Monday. However, the main catalyst for the move higher was Federal Reserve Chairman Powell's comments that rates are close to neutral, which contrasted with his prior statement in early October that rates are a long way from neutral. The softening in tone was interpreted as dovish from investors and resulted in bonds rallying, the U.S. 10-year Treasury yield falling back down near 3% (the lowest level in more than 10 weeks), and the U.S. dollar weakening. Oil finished the week marginally higher, but had the worst monthly decline since October 2008.

Just prior to his departure to Argentina to attend the G-20 summit on Thursday (11/29) President Trump announced that his meeting with Russian President Vladimir Putin had been cancelled. This action is intended to be a show of disapproval over the recent Russian seizure of 3 Ukrainian naval ships in the Black Sea near Crimea last week. It will be interesting to see if they meet casually anyway.

This week British Prime Minister Theresa May faced a lot of criticism on the most recent version of the Brexit plan approved by the European Union last week. While the official parliamentary vote won’t be cast until December 11, she has been unable to rally much support, and most strategists believe it has little chance of being passed. The problem is, there appears to be no plan B. Separately, the bigger story in Europe by some perspectives, is the Italian budget, which with its current 2.4% deficit target violates European Union (EU) rules, and some EU officials believe could actually be closer to 2.9%.

All eyes will be on the upcoming G20 Summit and the Trump-Xi trade talks this weekend for any signs of de-escalation of trade tensions. The geopolitical tensions is a definite source of volatility. While President Trump may not be meeting with Vladimir Putin at the G-20 summit, he is still scheduled to meet with Chinese President Xi Jinping. Prior to this meeting, President Trump has been saying that he expects to raise tariffs next year, so the expectations bar has been set fairly low. While a major agreement is highly unlikely, if the two leaders can simply come away with an agreement to freeze all tariffs at current levels, the market is likely to perceive it as a victory and rally accordingly. According to a story in the Wall Street Journal on Friday (11/30), the U.S. and China have been having discussions over the telephone to pause all changes in the level of tariffs until spring of next year. Since the two leaders will be meeting on Saturday (12/1), pay close attention to the news over the weekend as it could have a huge impact on the markets next Monday (12/3).

How the market finished last week, the S&P 500 up 4.8%, the Nasdaq up 5.6%, and the Dow up 5.2%.

This Week: With a +4% gain already from the post correction lows, dovish comments from the Fed, and low expectations about the upcoming Trump/Xi meeting on Saturday, optimism is relatively high, despite signs that high volatility is also still likely.

High volatility usually means big moves in both directions, and nothing could illustrate this fact more than the 40 and 61 point gains on Monday (11/26) and Wednesday (11/29) respectively, which followed two declines of 45 points and 48 points in the prior week.

The vast majority of the indicators are moderately bullish for next week. This could be due to the sizable Fed-induced bounce (+4%) that has already occurred since the correction bottomed on 11/23, or it could be optimism regarding what may or may not occur between President Trump and Chinese President Xi Jinping at the G-20 summit over the weekend. It does seem that the expectations are fairly low, so it is hard to imagine an outcome that would disappoint the markets.

The VIX index is clearly saying that the recent volatility is not yet over and large swings are still likely. And then there is the issue of the Technical Death Cross that is likely to occur on Friday (12/7). Taking all of this into account, the logical outlook for next week is volatility is likely to be the highest at the beginning and the end of the week.

Economic Calendar: ISM Manufacturing Index (12/3), Productivity and Costs (12/5), International Trade Balance (12/6), Employment Report (12/7) 

Some of the major earnings announcements on deck: TOL, AZO, MOMO, LULU, KR.

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