By Pete Biebel, Senior Vice President

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“Mayday” is an internationally recognized emergency alert word that was originated in 1923 by a senior radio officer at an airport in London.  He had been asked to come up with a word, which could be easily understood by airmen and ground crews, that would be specifically used to indicate an emergency.  Because the quality of radio transmissions in that era was still fairly primitive, they needed a very distinctive sounding word.  And, because much of the traffic at the time was between Croydon Airport in London and Le Bourget Airport in Paris, he came up with “mayday,” which is more or less a homophone of the French phrase m’aider (‘help me’).

May Day, May 1st, was last Wednesday.  It was a day of spring festivals in ancient times and even now is a traditional spring holiday in many cultures.  This year, May Day was also Fed Day, so you maybe already see where this is going.  Both the NASDAQ Composite Index (COMP) and the S&P 500 Index (SPX) made slightly higher new highs on Monday. They drifted lower on Tuesday in an air-pocket of earnings-announcement turbulence.  Their flightpaths had leveled-off and they were actually climbing again into and through the May Day Fed policy announcement Wednesday afternoon.  The mayday was sounded just minutes after Chairman Powell began his press conference.  The market, which apparently was expecting much more dovish commentary, suddenly went into a nosedive.

It’s bad enough that, on a day on which SPX pushed to a new high, it failed to hold on to some of those gains.  It’s even worse that those minor gains turned into significant losses as the afternoon unfolded.  And, it’s especially bad news that the indices ended at their lows of the day and below the low of the prior day.  It was a truly alarming development.  The descent continued through the first few hours of trading on Thursday.  SPX dipped to very near that old 2900 level at its morning low.  From there the averages were able to pull out of the dive and regain some of the lost altitude.

Still, it was the second losing session immediately following the new high on SPX.  The behavior of the averages on Friday could tell us a lot about whether the May Day mayday was a true sign of danger or just a false alarm.  If the market was to take out the Thursday low, then it would likely be a signal to scramble the rescue squad.  Conversely, climbing back above Wednesday’s new high would nullify the alarming May Day action; just another forgotten Fed faux pas.

Friday morning brought some positive earnings announcements, a very strong Non-Farm Payrolls number and a decrease in the Unemployment Rate to a 50-year low.  It was all more than enough to inspire a rush of buying.  The averages all gapped steeply higher on the opening.  But, though the averages continued higher for most of the session, neither SPX nor the Dow Jones Industrial Average (DJIA) made it back to their Wednesday high.  COMP did marginally exceed its Wednesday high, but fell short of its record high set on Monday.

COMP’s performance made it the big winner for the week, up 0.22%.  DJIA ended the week with a net loss of 0.14%.  SPX, which was down about 1 ½% at the Thursday low, rebounded to a 0.20% net gain for the week.  For both DJIA and SPX, the entire range for the week was the distance from the Wednesday afternoon high to the Thursday morning low.

The Friday rebound went a long way toward nullifying the May Day mayday, but not quite far enough to confirm that it was a false alarm.  This week, in addition to watching for new highs on COMP and SPX, you might also keep an eye on the Financials sector and on the Russell 2000 Index of small-cap stocks (RUT).  The S&P Financials Sector Index was the second worst performing U.S. equity sector through the first three months of the year, gaining less than 10%.  Over the past five weeks, it’s been the best with a gain of more than 9%, with more than three percentage points of that gain coming just last week.  That sector is still about 3 ½% below last summer’s high and about 8% short of its peak in early 2018, so it’s still in recovery mode, but any follow-through gains this week would likely be a positive sign for the overall market.

RUT’s year-to-date rebound stalled at its 200-day moving average in late-February and failed to exceed that high over the next two months.  While RUT had the same sort of up-down-up week as its big brother indices, it was the only one to make a new year-to-date high on Friday.  Even with last week’s gain, RUT is still about 7% below its 2018 high, but there doesn’t appear to be any significant overhead resistance between here and there.  If RUT can make any significant additional progress this week, it would be a very encouraging sign for stocks in general.

If COMP and SPX take out their Thursday lows in the coming days, it would be a very discouraging sign for stocks in general.  If SPX falls below the 2900 level, it would likely be headed for the 50-day moving average near 2850.  Even then, the intermediate-term uptrend would still be intact.  My guess is that as long as SPX doesn’t drop below 2850, that index still has a good shot at higher highs.  However, as I wrote last week in Take Me Out to the Ballgame, “Still, now may not be the most appropriate time to swing for the fences.  My guess is that, at best, SPX might get up into the ballpark of the 3025 level in the coming month or two.  Adding equity exposure now risks the likelihood of having to ride out an intermediate-term timeout/pullback before the market has the potential for any significant new appreciation.”

The list of economic reports for the week is a very short one with nothing of significance until late in the week.  Likewise, the number of earnings reports this week is much smaller than in the past two weeks.  A likely more significant catalyst in the days ahead might be developments in the trade war negotiations.  On Sunday afternoon, the Wall Street Journal reported that President Trump intends to increase tariffs on certain Chinese goods from 10% to 25% on Friday.  The trade talks are scheduled to resume on Wednesday and the President has tweeted his concern that the talks have been progressing too slowly.  Late Sunday evening, U.S. stock index futures were showing losses of about 2% in response the apparent breakdown in trade negotiations.

Date Report Previous Consensus
Tuesday 5/7/2019 JOLTS Job Openings 7.087mm 7.215mm
Thursday 5/9/2019 Initial Unemployment Claims 230K 220K
International Trade, Trade Deficit $49.4B $50.1B
Producer Price Index-FD, M/M +0.6%  +0.2%
Producer Price Index-FD, less Food & Energy, M/M +0.3%  +0.2%
Friday 5/10/2019 Consumer Price Index, M/M +0.4%  +0.4%
Consumer Price Index, less Food & Energy, M/M +0.1%  +0.2%

 

Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market