Market Direction Week of February 3, 2020: Correction or Pull Back?

Market Direction: BULLISH alert issued 10/24/2019



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Market Direction Week Review: The market has been bullish for the last 13 weeks. The stock market is under pressure and this week will determine a lot about if we continue to see the stock market decline. Continue to check the website this week to see if our model confirms a change in market direction. 

Separately, President Trump signed into law the new United States-Mexico-Canada Agreement (USMCA) on Wednesday (1/29). The new trade agreement, which updates and replaces the 26-year old North American Free Trade Agreement (NAFTA) represents a rare bi-partisan effort, though no Democrats were invited to the signing event, despite playing a key role in the inclusion of labor standards, drug patent protections, and environmental safeguards.

The top news item again this week in Asia, was the further spreading of the new respiratory coronavirus. At the time of this writing, nearly 10,000 cases of the illness have been confirmed in China, including 230 deaths. Several countries have advised residents to avoid all non-essential travel to China, and numerous flights to and from China on several international carriers have been cancelled. Cases have now been confirmed not only throughout Asia, but also in the US, Italy, and the UK. On Thursday (1/30), the World Health Organization (WHO) met and declared the outbreak a global health emergency. However, this news actually sparked a brief afternoon relief rally in US equities when the WHO said domestic travel and trade restrictions were not necessary, and that China’s efforts to contain the disease are commendable. That rally was followed by further selling on Friday (1/31) as the outbreak continued to spread.

I spent some time this week researching many of the previous virus outbreaks in history. While SPX data in the table is correct, I cannot guarantee 100% accuracy of the outbreak dates or the number of cases due to contradictory information from various sources (WHO, NIH, CDCP and others). That said, you can see that the total number of cases for this virus now exceed the 2003 SARS outbreak, and some early estimates indicate the economic impact could subtract as much as -2.0% from Chinese GDP in Q1. Historically previous viral outbreaks have not had a significant or lasting impact on the US economy, though Goldman Sachs is forecasting the impact could subtract as much as -0.4% from US GDP in Q1. I will continue to watch this closely and update the table accordingly, because this issue appears far from over at this point.

At long last, Brexit has arrived! This week in Brussels the European Union's (EU) chief Brexit negotiator Michel Barnier met with members of the other 27 EU countries, and officially formalized the 1/31/20 Brexit date. The deal, which allows the UK to slowly unwind its trade and travel connections with the EU until 12/31/20, leaves the terms of the final relationship largely unresolved. Those issues will need to be decided by the December 2020 deadline. Brexit has been so long in coming (approved in May 2016) and postponed so many times, that it may be a non-issue everywhere except in the UK.

How the market finished last week, the S&P 500 down 2.1%, the Nasdaq down 1.8%, and the Dow down 2.5%.

Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bullish Alert recently started on 10/24/19 and we suggested to our followers they can trade any new long positions based on are model. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in an uptrend (see Market Direction Mid Week Update: Trading Strategies).  

We’re approaching the half-way point in Q4 earnings season. With 224 companies (45%) of the S&P 500 reporting, EPS beat 75% and Rev beat 64%.

Chinese markets have been closed since 1/23 but will reopen on Monday 2/3 and selling is expected to be heavy. High volatility in US markets on Monday seems likely, and that can mean big moves in both directions. Those traders unaccustomed to volatile markets may want to remain on the sidelines in the short-term.

As Britain enters its first week outside of the EU, finalized private sector PMI numbers are due out. Expect plenty of sensitivity to any revisions, particularly manufacturing and service sector numbers due out on Monday and Wednesday.

As stocks enter the month of February, worries about the coronavirus that slammed stocks in January could continue to be a big market catalyst in the week ahead.

There are lots of other possible drivers for markets, including the January jobs report Friday and other key economic news, which comes as worries grow that the economy was already weakening even without the impact of the rapidly spreading virus.

Another focus for markets could be the Iowa Democratic presidential caucus Monday, where Vermont Sen. Bernie Sanders could possibly win over former Vice President Joseph Biden.

But the virus headlines could dominate, rattling stocks and continuing to drive investors into the safety of bonds. U.S. airlines Friday said they were discontinuing flights to China, as Beijing tries to contain the transmission of the virus that had infected nearly 10,000 people by Friday.

Various indicators and patterns are showing signs of caution. The S&P 500 fell 1.8% Friday to 3,225, its worst day since October. It was down 2.1% for the week, and ended the month with a 0.2% loss, its first negative month in five.

Economic Calendar: ISM Mfg Index (2/3), Factory Orders (2/4), International Trade (2/5), Employment Report (2/7)

Some of the major earnings announcements on deck: GOOGL, DIS, MRK, ABBV, ICE.

$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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