By Pete Biebel, Senior Vice President

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So much fuel and so little flame.  So much news and so little volatility.  Through the fourth quarter of last year the market averages snapped back and forth like a flag in a thunderstorm.  Now that storm has passed, and the markets seem as limp and unmoving as a flag waiting for even a wisp of a breeze.  The market averages that were rocked by tidal waves of volatility a few months ago now seem as calm as a quiet lagoon.  As the market indices have danced higher over the past two months, the tempo has clearly slowed.  Meanwhile, the volatility index, VIX, has limboed ever lower.  For the past two weeks, VIX has ended the week at its lowest levels in four months.

During the January rally, the market’s inferno seemed to be stoked by even the merest good news.  In February that blaze faded to just a few glowing embers.  Last week’s news provided plenty of fuel to rekindle the fire.  Cohen, Powell and Lighthizer sang for Congress in a trio of appearances.  The Trump/Kim summit turned out to be a non-event ‘Nam event.  Wednesday’s Fed meeting minutes release generated the smallest market reaction in years.  Mixed economic news included a much worse than expect trade deficit and a much better than expected GDP increase.

It all ended with the Dow Jones Industrial Average (DJIA) down a scant 0.02% for the week.  Solid gains in sectors like Technology, Energy, Financials and Healthcare helped the S&P 500 Index (SPX) rack up a 0.39% gain for the week.  That gain nudged the Index back above the 2800 to its highest closing level since early-November, just below 2804.  In addition to the Tech sector, the NASDAQ Composite Index (COMP) got a shot in the arm from healthy gains in Biotech and Pharma stocks.  COMP was up 0.90% for the week and ended the week at its highest closing level since mid-October.

Early last week, things weren’t looking very promising.  News that President Trump would again postpone a scheduled increase in the tariff on Chinese goods ignited a moon-shot rally on Monday’s opening.  Unfortunately, that rally quickly fizzled, and in what is likely the most negative development in the market this year, the averages gave back a large portion of the early gains as the day unfolded and closed near their lowest levels of the day.

In a market that is so extended, a negative omen like Monday’s reversal might be expected to see significant follow-through selling, but the averages got through a quiet Tuesday with little if any additional damage.  Wednesday was potentially the peak news day of the week.  The indices sold-off early, down by nearly 1% in the first hour of trading.  It presented another great opportunity for the bears, but the averages gradually rebounded through the remainder of the day to finish with losses of just 0.1% or so.

Then, in perhaps the biggest news week of the year-to-date, Thursday brought the dullest, narrowest range trading in months.  “Where’s the fire?” indeed.  Friday morning brought the second big gap-up opening of the week on strength in international markets.  Through much of the session it looked as though we might get a repeat of the Monday reversal until a wave of buying late in the day saved the week for the bulls.  The bulls seemed to be determined to push SPX above the magic 2800 level (Check!) and to push DJIA back up to a gain for the week (Close, but no cigar).  COMP and SPX got back to near their highs of the week, though in the end, for most of the major indices, the Monday morning highs proved to be their highs of the week.

Over the past couple weeks, trading action has been displaying more negative symptoms, but so far, they’ve caused no ill effects.  Recent action has seen the market’s short-term upward momentum all but disappear.  It has also produced more days on which the indices finish near their lows of the session.  Those are a couple of minor symptoms one would expect to see as a short-term uptrend begins to die.  Other, more significant ails are yet to appear.  SPX is still above its 200-day moving average and that index hasn’t even come close to testing or violating any key levels.

Given the extended nature of the current rally, it seems likely that SPX will fall back below 2800 soon.  The more important level is that index’s 200-day moving average, currently near 2750, about 2% below current levels.  The Russell 2000 Index of small-cap stocks (RUT) has rallied about 23% from its Christmas Eve low, though it’s been flat for the past seven sessions.  It clanged into its 200-day moving average just after Presidents’ Day.  It has touched the 200-day every day since then but has been unable to close above it.  If RUT falls significantly below its 200-day, that would greatly increase the probability that COMP and SPX will test their 200-day averages soon.

One factor to watch in the coming weeks is the direction and rate-of-change in interest rates.  The yield on Ten-Year Treasury Notes was stuck near one-year lows between 2.63% and 2.73% for the entire month of February.  Late last week, that rate spiked to 2.754%, near its highest level of the year and back above its declining 50-day moving average for the first time since late-November.  That surge in rates caused a similar and simultaneous spike in the Dollar Index, which had been trending lower.  Those spikes combined to cause a steep decline in the price of gold, which had been trending higher.  If the Ten-Year yield continues to climb, we should expect continuation of the reactionary moves in the Dollar and gold.

A second factor that’s really more of a curiosity is the relative performance of international equity markets.  Most developed market and emerging market indices were generally heading south for most of 2018 after peaking in January last year.  Their performance relative to the U.S. market began to improve as our indices got hammered late last year.  Like our market, the international equity indices have rebounded nicely this year, led by the emerging market indices.  There’s a good chance that many of those international markets will outperform the U.S. market over the next several months.

Lately, the most effective catalyst for broad market movement (beyond individual company earnings) has been news on progress in resolving the trade war, or news to the contrary.  My impression is that the market has already priced-in expectations for a positive resolution.  Watch how the market reacts to trade war news in the coming weeks.  If good news results in just a flash-in-the-pan rally that is quickly reversed, it will likely be a sign that an overdue phase of resting and retracing has begun.

Late Sunday, the Wall Street Journal reported that the U.S. and China were “in the final stages of completing a trade deal.”  Stock index futures were trading about ½% higher following that news.  It looks like Monday could be the first test of the theory that a resolution to the trade dispute is already priced into the market.  The wildcard for early-March is that Robert Muller is likely to submit his long-awaited report soon, perhaps even later this week.

 

Date Report Previous Consensus
Monday 3/4/2019 Motor Vehicle Sales 16.6mm
Construction Spending, M/M +0.8% +0.6%
Tuesday 3/5/2019 PMI Services Index 54.2  56.2
New Home Sales, SAAR 657K  591K
ISM Non-Manufacturing Index 56.7 57.2
Wednesday 3/6/2019 ADP Employment Report +213K +180K
International Trade, Trade Deficit $49.3B $57.6B
Fed Beige Book
Thursday 3/7/2019 Challenger Job Cut Report 52,988
Initial Unemployment Claims 225K 22K
Productivity and Costs, Non-Farm Productivity, Q/Q, SAAR +0.9%

 

 +1.6%
Productivity and Costs, Unit Labor Costs, Q/Q, SAAR +0.9% +1.8%
Friday 3/8/2019 Employment Situation, Non-Farm Payrolls, M/M +304K  +178K
Unemployment Rate 4.0%  3.9%
Average Hourly Earnings, Y/Y +3.2%  +3.4%
Housing Starts, SAAR 1.078mm 1.170mm

 

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