Market Direction Week of May 20, 2019; Trade talks continue

Market Direction: BULLISH alert issued 1/10/2019



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Market Direction Week Review: Stocks sold off sharply to start the week, as rising trade tensions between the U.S. and China drove concerns that global growth could be negatively impacted. As the week unfolded the markets recovered on optimism that the latest tariff news is a temporary setback and that a deal can still ultimately be reached. The markets finished out the week only modestly lower. Trade headlines are likely to continue to drive periods of market volatility.

Another reason Wall Street may have taken the deepening trade conflict with China largely in stride was a growing perception that the Federal Reserve would step in to counteract any economic slowing because of tariffs. By Thursday, futures markets were pricing in a more-than-75% chance that the Fed would cut rates by September.

The week’s economic data provided mixed evidence that the Fed would need to act to support growth. Industrial production contracted much more than expected in April, driven largely by declining auto manufacturing. Retail sales also fell back, defying expectations for modest rise. On the positive side, the University of Michigan’s gauge of consumer sentiment jumped to a 15-year high, and weekly jobless claims fell back. April housing starts also rose more than expected.

On Friday, President Trump announced he would delay a decision to impose tariffs on automobiles imported from Europe, Japan, and other countries for at least six months. Last year, Trump threatened to place 25% tariffs on car imports from the EU. Since that threat, neither the U.S. nor the EU has begun official trade talks.

How the market finished last week, the S&P 500 down 0.8%, the Nasdaq down 1.3%, and the Dow down 0.7%. 

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Market Direction This Week: We track the stock market with our Bullish and Bearish Alerts and for the last 17 weeks the stock market has been Bullish. The returns since the alert was made have been amazing and continue to be impressive (see Market Direction Mid Week Update: Trading Strategies).

Q1 earnings season is winding down 90% over but there are still some significant retail players reporting next week, see below.

Inflation has continued to remain in check and the consensus on the Fed’s outlook remains dovish, so the next move still appears to be a cut rather than a hike. It’s worth pointing out that this morning’s 74% probability of a cut sometime in 2019 is a sizeable jump from last Friday’s 58% closing level.

The SPX is only 3% off its all-time highs and is holding up relatively well considering the recent trade tensions. However, here are some highlighted concerns:

• The recent May 3^rd 2,945 all-time closing high was only 16 points above the prior all-time of 2,929, which could end up establishing a double top formation.
• The SPX recently dropped below its 50-day SMA for the first time since January and hit a six-week low of 2,801 on Monday.
• Seasonally, May and (more so) June are not historically bullish months for equities.

Does this mean that I have a bearish outlook on the SPX? No, but I’m more cautious at current levels, especially given the ambiguity surrounding global trade relations. On the plus side, the SPX looks like it is trying to reclaim the 50-day SMA after opening below it earlier this morning. In terms of near-term support, look no further than the 2,800 level (where this index found support on Monday and back in late March) and I’d feel more comfortable, from a bullish perspective, if the SPX closes above 2,900 (which currently coincides with the 20-day SMA): 

Economic Calendar: Existing Home Sales (5/21), Continuing Claims (5/23), Durable Goods (5/24) 

Some of the major earnings announcements on deck: HD, TJX, ROST, TGT, AZO

$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. Building a community of investors one trade at a time. Share with a friend. Cha-ching!

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