Market Direction Week of January 28, 2019©

Market Direction:BULLISH alert issued 1/10/2019

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Last Week Review: U.S. stocks finished mixed for the week, taking a breather following the strong performance since the beginning of the year. The International Monetary Fund (IMF) cut its 2019 and 2020 global growth forecasts, but that was hardly a surprise given trade tensions, the China slowdown, and declining PMIs in Europe and Japan. On Friday President Trump announced a deal to temporarily reopen the government for three weeks, while negotiations for border security continue. In the absence of any major developments in the other recent market overhangs (U.S. - China trade tensions and the Brexit outcome), company earnings releases drove much of this week's stock market action. Earnings reports can prompt volatility in individual stocks.

On Thursday (1/24) the Senate voted against two proposals to temporarily end the government shutdown; one from Democrats (which received support from 6 Republicans) and one from President Trump (which was supported by only 1 Democrat). While President Trump has agreed to postpone his State of the Union address, as requested by House Speaker Nancy Pelosi, as of this writing (mid-day Friday 1/25) the two sides of the government have yet to reach an agreement to reopen it.

However, there are rumors that Senate Majority Leader Mitch McConnell and Minority Leader Chuck Schumer are privately negotiating a deal that could end the shutdown over the weekend. Even if that happens, (as I mentioned above) today (1/25) many federal workers are due to miss their second paycheck since the shutdown began.

This week in Brexit news, UK Prime Minister Theresa May may be feeling a sense of rebuke as both prominent EU member leaders and her own parliament seem to be growing ever more supportive of the idea to delay the 3/29 deadline. This would be done through an extension of Article 50; the section of the Treaty of Lisbon that gives a country 2 years to exit the European Union; a tactic that May does not support. However, threats from leaders of prominent corporations such as Airbus, BMW, Toyota, Peugeot/Citroen, and several major international banks, that they may be forced to move future business out of the UK in the event of a no-deal Brexit, may eventually soften her stance.

On Thursday (1/24) Commerce Secretary Wilbur Ross quashed any optimism that a new trade agreement with China was close, or even imminent. While he indicated that he would like to see an agreement that would work for both parties, in his words, “Washington and Beijing remain miles and miles apart on a new deal”. If the two sides cannot forge a new agreement before the 90-day tariff “ceasefire” ends on 3/1/19, 10% tariffs on $200B in Chinese imports will automatically increase to 25%. Chinese trade officials have said they would be willing to purchase up to $1T in additional U.S. goods over the next 6 years, as a measure of reducing their trade surplus, but only if the US agreed to drop existing tariffs.

How the market finished last week, the S&P 500 down 0.2%, the Nasdaq up 0.1%, and the Dow up 0.1%.

This Week: While Brexit challenges continue and trade negotiations with China appear to be stalled out at the moment, negotiations to reopen the government seem to be finally making some progress and could end the shutdown over the weekend.

Last week’s outlook of “Volatile” seems to have been about right as the intraday swings in the SPX have been rather high again this week. While the current level of the VIX index is implying daily swings of about 25 points, the first two sessions of the week resulted in intra-day swings of more than 40 points.

Next week brings not only an FOMC meeting (which will be followed by a press conference) but also reports on the January employment situation, both of which have a history of causing volatility in the markets. Combine these with the government shutdown (which may or may not be resolved over the weekend), lingering Brexit challenges, and lack of progress on negotiations with China, and you have a recipe for high volatility again.

Economic Calendar: International Trade (1/29), Wholesale Inventory (1/29), FOMC Rate Decision (1/30), Chicago PMI (1/31), Employment Report (2/1)

Some of the major earnings announcements on deck: AAPL, FB, BABA, BA, TSLA.

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