By Pete Biebel, Senior Vice President

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For the previous six straight weeks, the market averages ended the week near or above the 90th percentile of their range for the week.  In other words, for the past six weeks in a row, the averages ended the week very near their highs of the week.  It has been a pretty spectacular rally.  Could the market make it seven in a row?  ‘Fraid not.

For the week, the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) just barely crawled back to tiny net gains for the week.  The NASDAQ Composite Index (COMP) was the big winner on the week, but even its net gain was less than half of one percent.  And even those less than sparkling results were burnished by a sudden steep rally in the closing fifteen minutes on Friday.  Still those indices all ended the week slightly below the middle of their trading ranges.  It was the first time this year that they didn’t close near their highs of the week.

Things started out well enough.  The averages poked higher on Monday and Tuesday, moving beyond the prior week’s highs and to their highest levels since early-December.  The progress of both COMP and the SPX stalled just below their 200-day moving averages.  Would the rally continue to reach new highs?  ‘Fraid not.  No new progress was made on Wednesday when the major indices merely meandered sideways within the range of the prior day.  It was the narrowest range day so far this year.

Bad news for the market came early on Thursday.  News that the European Commission had slashed its forecast for GDP growth in the region’s major economies roiled markets worldwide.  European markets were showing losses of 1 to 2% as trading began here.  The major U.S. averages were down about three-quarters of a percent in early trading.  An attempted rebound was cut short mid-morning on news that White House advisor Larry Kudlow indicated that “there is a pretty sizeable distance to go” in U.S./China trade talks.  The averages quickly took out their morning lows and continued lower.  Friday brought a slightly lower low before the market stabilized and rebounded late in the day.

SPX’s range for the week was its narrowest since late-September.  The last few weeks have produced several very narrow range days and a couple very narrow range weeks.  Those narrow ranges, especially occurring at the upper end of a rebound, suggest that the market has reached an equilibrium level.

The big volatility of December and early-January has gone into hibernation.  We should expect that headlines regarding the U.S./China trade war, and perhaps even headlines regarding the looming government shutdown, are likely to cause spurts of volatility in the coming weeks.  One other factor seems to be a growing threatening blip on traders’ radar.  The fear of slowing global growth may be becoming more of a reality.  The European Commission’s reduced growth estimate last Thursday was the scariest news to hit the markets in weeks.  Headlines of disappointing economic data from both developed and emerging market countries seem to be popping up more frequently.

I saw one such troubling headline this past weekend: “Ocean Shipping Rates Plunge.”  The Baltic Dry Freight Index (BDFI) tracks the cost per day of renting an ocean-going container ship.  The Index is a reliable indicator of the general level of worldwide economic activity.  The healthier the world’s economy, the greater the demand for shipping goods.  The BDFI has been declining since it peaked near the 1800 level early last summer.  Since early December it has sunk from near 1400 to just 600.  The annual slowdown around the Chinese New Year celebrations and the shutdown of mines following the burst of a mining dam in Brazil last month have contributed to the decline in rates.  Still, as a barometer of economic activity, BDFI seems to be forecasting the potential for storms.

One ray of sunshine for the market has been that the current Earnings Season has brought generally positive results.  With over 60% of the S&P 500 companies having reported so far, about 70% of the reports have been better than expected.  Just 20% or so have been disappointing.  Pretty good news, right?  ‘Fraid not.  The estimates for S&P 500 stocks’ 2019 earnings have been declining steadily for the past six months.  S&P’s own estimate for 2019 earnings was a little over $177 in August.  It slipped below $174 in December and dropped to a new low of $167.28 last week.  That’s still about 3 ½% above 2018 earnings, but not nearly as fat an increase as was priced into the market in the second half of 2018.

By a narrow margin, more of the U.S. equity sectors had losses last week than had gains.  At the bottom of the list was the Energy sector, down about 5% as Crude Oil prices slumped from the mid-$50s back into the low-$50s.  Two of the more defensive sectors, Utilities and Real Estate, each gained about 2% to put them at the top of the list for the week.

Last week’s so-so performance was the first bad news in the year-to-date rally.  The good news is that the market didn’t go down and stay down.  The averages broke down late in the week after stalling in the overhead band of resistance early in the week.  Thankfully the selling didn’t get out of hand and the market was able to find support and recover some of those losses on Friday.

I still think SPX will likely encounter stiff resistance in the 2715 – 2740 range.  And, I still think if it can somehow climb above 2750 and stay there, that would greatly reduce the prospects for a test of the lows.  Probably the worst thing that could happen would be to drop below last week’s low (around 2682 on SPX).  Doing so would likely spark an acceleration lower.  So, a higher high or a lower weekly low would be an important development this week.  And, with having had such a narrow range last week, there’s a good chance we’ll see one or the other.

This week’s economic calendar doesn’t hold much of significance until late in the week.  The string of earnings announcements unravels a little more this week.  We’ll have to hope that things don’t get too tied up or we’ll wind up with a frayed knot.

Date Report Previous Consensus
Tuesday 2/12/2019 JOLTS Job Openings 6.888mm  6.950mm
Wednesday 2/13/2019 Consumer Price Index, M/M -0.1%  +0.1%
Consumer Price Index, less Food & Energy, M/M +0.2% +0.2%
Thursday 2/14/2019 Initial Jobless Claim  234K 225K
Producer Price Index-Final Demand, M/M -0.2% +0.2%
PPI-Final Demand, less Food & Energy, M/M -0.1% +0.2%
Retail Sales, M/M +0.2% +0.1%
Retail Sales, less Autos & Gas, M/M +0.5% +0.4%
Friday 2/15/2019 Empire State Manufacturing Survey 3.9 7.0
Import and Export Prices, Imports, M/M -1.0% +0.2%
Import and Export Prices, Exports, M/M -0.6% +0.2%
Industrial Production, Production, M/M +0.3% +0.2%
Industrial Production, Manufacturing, M/M +1.1% +0.1%
Consumer Sentiment 91.2 92.5

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