By Pete Biebel, Senior Vice President
Last week I wrote that, “One key take-away from this week’s trading might be how COMP and SPX perform if, and when, they reach those big number levels. If SPX can punch through 2900 for more than a few hours and by more than a few points, then it’s likely to make a run at the old highs near 2940 very soon.” And, indeed, the NASDAQ Composite Index (COMP) and the S&P 500 Index (SPX) seemed to be magnetized to their big round numbers overhead last week. The averages shrugged off a little early-week weakness; they snuck closer to the big numbers on Wednesday and Thursday, then made their run for the border on Friday morning.
Positive economic news from China ignited rallies in world markets ahead of the Friday U.S. opening. Further enhancing the mood, several of the early reporters in the new earnings season saw bullish reactions in their stocks following their announcements before the opening. COMP jumped to within about one-tenth of one percent of the 8000 level in the opening minutes on Friday. Unfortunately, that was the high of the day. COMP was turned away at the border. It ended the day with a nice gain, off its high, but still within easy reach of the 8000 level. SPX also gapped-up Friday morning; it vaulted across the 2900 barrier on the opening and reached its high of the day near 2910 within minutes. It immediately eased lower but held at the 2900 level midmorning. SPX spent the remainder of the session oscillating around the 2905 level.
So, the jury is still out on whether SPX has successfully cleared 2900. COMP clearly still has some work to do. If SPX had been able to extend its morning gains, then a run to the old highs would have likely been right around the corner. If, instead, SPX had slumped right back below 2900, then that would have likely signaled the beginning of a week or two of backing and filling. It might seem silly to be so concerned with how the averages behave around their big numbers, but I suspect that their behavior with respect to those levels over just the next two or three days will tell us a lot about how the next several weeks are likely to play out.
Last week I also wrote that, “A second key to the market’s near-term health might be the performance or lack thereof in the Financial sector and in small-cap stocks.” Both the S&P Financials Sector Index and the Russell 2000 Index of small-cap stocks (RUT) ended that week right at their 200-day moving averages. As was the case with COMP and SPX, RUT and the Financials produced mixed and inconclusive results. RUT saw a small net gain for the week, but, at its best, it was barely above its 200-day moving average and is still trading below its February rebound high. Financials looked much better, but, like SPX, the sector’s Friday gap-up opening sputtered. That group was the best performing of the U.S. equity sectors last week with a net gain of about 2.3%. But, the lackadaisical action following the breakout attempt suggests that the sector needs to see follow-through very soon to be convincing.
Net for the week, COMP and SPX each gained about 0.5%. The Dow Jones Industrial Average (DJIA) jumped nearly 270 points or 1.03% on Friday, easily outgaining COMP and SPX on the day, but it wasn’t quite enough to get DJIA back to even for the week. The Dow ended the week with a net loss of 0.05%. Big swings in several of the DJIA component stocks were responsible for the discrepancy.
DJIA is a market average that includes just 30 companies. And, it’s a “price-weighted” average, meaning that a one-point move in any one of the 30 stocks will move DJIA by the same amount, about 6.8 points. A one-point move in a $25 stock has exactly the same impact as a one-point move in a $200 stock. Doing the arithmetic, a one-percent move in a $25 stock will move DJIA by about 1.7 points; a one-percent move in a $200 stock will cause about a 13.6 point move in the Dow. One of my articles from June 2018 (A Subpar Average) described how the DJIA’s narrow component list and its price-based weighting can lead to misleading indications regarding the performance of the overall market. Last October, in Lifting the Veil, I suggested that recent new highs in DJIA were masking the deterioration in the overall market. Now that the new earnings season is ramping up, DJIA is likely to see more days on which its performance diverges from that of COMP and SPX.
In recent weeks, even as the market has edged higher, market activity has become much more subdued than was the case through the first three months of the year. Extended periods of quiet, low volume trading have become more plentiful in the first two weeks of April. The past ten trading sessions have produced six of the lowest total NYSE volume days this year. Even on days when the market gapped on the opening, the averages have often slumped into a very narrow range for the balance of the session. The proximity of COMP and SPX to their big round numbers is likely a factor in the narrowing ranges. The recent muted activity might also be hinting that the year-to-date drive higher is running out of gas.
With the holiday shortened week ahead, it would be reasonable to expect continuing dull activity. If SPX can make a break one way or the other away from the 2900 level, it might inspire a pre-holiday spurt of volatility. Moving much beyond last week’s high would open the door for a run at the old high. Conversely, dropping quickly back below 2900 might potentially be the beginning of a multi-session pullback phase. As I wrote last week, “… short-term pullbacks are unlikely to do any serious damage to the uptrend. The bad news is that means that any danger levels for the indices are at much lower levels.” SPX could decline as much as 3% to 4% from current levels before it would be likely to do any technical damage.
The market typically enjoys a bullish bias coming into holiday weekends. In the short week ahead, the large number of scheduled earnings reports are likely to trigger gap openings on multiple days. The release of the Fed’s Beige Book report has been known to spark brief bouts of market volatility, but this Wednesday’s report is unlikely to produce any surprises.
|Monday 4/15/2019||Empire State Manufacturing Index||3.7||6.8|
|Tuesday 4/16/2019||Industrial Production, Production, M/M||+0.1%||+0.3%|
|Industrial Production, Manufacturing, M/M||-0.4%|
|Housing Market Index||62||63|
|Wednesday 4/17/2019||International Trade, Trade Deficit||$51.1B||$53.7B|
|FOMC Beige Book|
|Thursday 4/18/2019||Initial Unemployment Claims||196K||206K|
|Philadelphia Fed Business Outlook Survey||13.7||10.2|
|Retail Sales, M/M||-0.2%||+0.8%|
|Retail Sales, less Autos & Gas, M/M||-0.6%||+0.4%|
|PMI Composite Flash||54.3||54.3|
|April Options Expiration|
|Friday 4/19/2019||Good Friday Holiday – Exchanges Closed|
|Housing Starts, SAAR||1.162mm||1.230mm|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market