Market Direction Week of January 14, 2019©

Market Direction:BULLISH alert issued 1/10/2019

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Last Week Review: Stocks finished higher for the third straight week, with small-cap and international markets outperforming. After the recent gains, the S&P 500 is now up 10.4% from the December low1. The main drivers of the market rebound have been optimism around the U.S.-China trade talks, some backpedaling from the Federal Reserve on its interest rate trajectory, and oversold conditions. Talks between U.S. and Chinese officials took place in Beijing, with some encouraging comments hitting the press about the prospect of reaching a trade deal. Adding fuel to the rally, the FOMC minutes released this week showed a more cautious approach to the extent and timing of future interest rate hikes, noting that the Fed can afford to be patient about further policy firming. Lastly, a couple of company profit warnings failed to bend sentiment, which was interpreted as a sign of reduced expectations heading into the earnings season next week.

This market rebound has been encouraging, but it's too early to sound the all-clear. In the late innings of this expansion, the balance of encouraging and cautious indicators is likely to drive ongoing volatility. More specifically, we don't anticipate the market to return to new highs quickly, as it has done fairly consistently following pullbacks during this expansion. But we don’t think ongoing volatility should be interpreted as the inevitable end to this bull market. As the table shows, most pullbacks are not the start of a bear market. Interestingly, current conditions (an extended economic expansion, falling oil, a slowdown in Asia, anticipation of tighter Fed policy, fluctuating global currencies) resemble those of 1998, a period that saw a steep market pullback, followed by an extended bull market. We think investors should let their long-term strategy be their guide, aligning portfolio decisions with goals and comfort with risk. Doing so can create long-term opportunities out of short-term market reactions.

Period	Catalyst	Decline	Became a Bear Market?	Total Return over Next 12. Mos.2
Late-2018	Recession + trade fears	-19.8%	??	??
Early-2018	Rising rates	-10.2%	NO	??
Early-2016	Falling oil, rising dollar	-12.0%	NO	27.8%
2015	China slowdown, Fed rate hikes	-12.4%	NO	17.5%
2011	Eurozone debt crisis	-19.4%	NO	30.7%
2010	Recession fears	-16.0%	NO	33.0%
'08-'09	Housing bubble, financial crisis	-56.8%	YES	70.6%
2003	Iraq war	-11.7%	NO	43.2%
2000	Tech bubble	-49.1%	YES	32.5%
1999	Fed tightening	-12.1%	NO	8.3%
1998	Asian/currency crisis, LTCM collapse	-19.3%	NO	25.7%

On Wednesday evening President Trump spoke from the Oval Office in an attempt to generate support for building a southern border wall, followed by a democratic response from House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer; if anything, negotiations since then have deteriorated further. As of this writing (mid-day Friday 1/11) the two sides seem no closer to an agreement than they were a week ago. Friday (1/11) is the first federal payday since the shutdown began, so the impact to about 800,000 federal workers and a large number of contractors who are not being paid is now much more critical.

While low-level negotiations between the U.S. and China last week ended with increased optimism, the next steps from here remain rather unclear, as no new talks are yet scheduled. Given that there is only about 6 weeks left for the two countries to work out their differences before higher tariffs go into effect, time is running short. Part of the challenge in scheduling a meeting involving President Trump is that his attendance at the World Economic Forum in Davos later this month where a meeting might have taken place, is now in question due to the government shutdown.

How the market finished last week, the S&P 500 up 2.5%, the Nasdaq up 3.5%, and the Dow up 2.4%.

This Week: Trade negotiations with China and a Fed that seems unlikely to move on interest rates anytime soon, have driven an impressive market rebound from near-bear market territory. But markets never go straight up or down and indications are that a pause may be in the cards for next week.

Last week, the SPX seems well positioned for an upside or downside breakout, but there was little indication early in the week that it would happen. While it is debatable whether a 65-point gain in 4 sessions qualifies as a “breakout” it is a welcome development for sure. The strength in the stock market was enough to change the market direction alert to bullish.

Expect more volatility this week, as a busy earnings season kicks off with the usual round of updates from the big US banks. This comes in addition to the ongoing barrage of trading statements from UK firms regarding their Christmas trading.

Meanwhile, economic data sees important events like Chinese exports and UK consumer price index (CPI), but the key event will be the vote on the Withdrawal Agreement in parliament.

Economic Calendar: PPI Index (1/15), International Trade (1/16), Retail Sales (1/16), Industrial Production & Capacity Utilization (1/18)

Some of the major earnings announcements on deck: C, JPM, AA, UNH, NFLX.

$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend. Cha-ching.

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