Market Direction Week of January 21, 2019©

Market Direction:BULLISH alert issued 1/10/2019

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Last Week Review: Stocks rose for the fourth consecutive week, the longest stretch since August of 2018. The focus shifted to corporate earnings, with several high-profile banks reporting quarterly earnings. All together, earnings were better than feared, and more importantly, commentary from management teams about the outlook was positive. As a result, the financial services sector outperformed the broader market, finishing 6% higher¹. Outside the U.S., news was more mixed. 

Markets reacted positively to Chinese efforts to stimulate the local economy and reports that China is willing to take steps to reduce its trade surplus with the U.S. in order to achieve a trade deal. In Europe, the Brexit drama continues. While the U.K. Parliament rejected the Prime Minister's deal to leave the European Union, Theresa May survived the vote of no confidence. What happens next is uncertain, but investors are increasingly speculating about a second referendum, or an extension of the Brexit deadline. Summing up, the S&P 500 has now quickly recovered more than half of its losses since September's peak. The market in December reflected oversold conditions, but it also poses some risk that the path from here could be rockier than it's been the last three weeks.

The two sides seem no closer to an agreement than they were a week ago, or even 2 weeks ago. With this in mind, here is an update where the current [partial] shutdown stands relative to previous shutdowns. It is clearly both the longest and most bullish in history (as of 1/17/19); the latter of which is probably not helping with the negotiations to end it.  

In the latest installment on the Brexit saga, as was largely expected, UK Prime Minister Theresa May was dealt a stunning defeat on Tuesday (1/15) when Parliament overwhelmingly rejected (by a vote of 432 to 202) her Brexit draft accord with European Union leaders. However, she narrowed survived a no-confidence vote the next day by a much narrower margin (325 to 306). Apparently Parliament doesn’t like what Prime Minister May is doing, but are nonetheless fully comfortable with allowing her to continue doing it.

As a result of the ongoing trade war between the U.S. and China, export volume from China (to the U.S.) dropped 4.4% in December and import volume from the U.S. (to China) dropped 7.6%. As a result the overall net trade deficit worsened. This seems to indicate (as so many economists have said) that everyone loses in a trade war. If the two sides cannot forge a new agreement by 3/1/19, higher tariffs will go into effect. Since President Trump has stated that he is not planning to attend the World Economic Forum in Davos later this month due to the government shutdown, negotiations are ongoing only between lower-level cabinet members, and no future meeting between President Trump and President Xi is currently scheduled.

How the market finished last week, the S&P 500 up 2.9%, the Nasdaq up 2.7%, and the Dow up 3.0%.

This Week: A potential breakthrough on trade negotiations with China on one side, versus a market that is technically overbought in the near-term, little progress on the government shutdown and the Brexit, all set the stage for a potentially volatile week next week.

On Thursday afternoon (1/17) just a rumor that the U.S. may ease up on Chinese tariffs caused the SPX to jump 23 points in a matter of minutes. I think this is indicative of what I’ve been saying for many weeks; if the U.S. and China can resolve their trade differences, equities could climb 10% or more relatively quickly. If negotiations stall or tariffs go up on 3/1 as currently scheduled, the upside potential for the year is likely to be limited to single digit gains at best.

While nothing is certain at this point, these rumors do create the possibility of more upside in the near term, but any setbacks also create the possibility of a sharp downside reversal, especially given the SPX is +12% in only about 3 weeks and a bit overbought at this point.

Economic Calendar: Leading Economic Indicators (1/24), Durable Goods (1/25), New Homes Sales (1/25) 

Some of the major earnings announcements on deck: HAL, BMY, IBM, INTC, PG.

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