By Pete Biebel, Senior Vice PresidentPrint This Post
Alarms were sounding throughout the week as the averages saw follow-through selling and lower lows. Last week I wrote about the May Day mayday, describing how the reversal from a new high on Wednesday, 5/1/19, was an alarm for investors, alerting them that the potential for at least a short-term timeout in the market’s rally was at hand. That reversal was widely blamed on Fed Chairman Powell’s not-quite-dovish-enough comments in his press conference that afternoon. The market’s ability to rebound on Friday of that week eased some of the concern. Unfortunately, this past week brought a series of headlines on the U.S trade negotiations with China that set off more alarms for investors.
It all began with a precarious gap-down opening on Monday in response to news that President Trump, out of his frustration with the slow pace of the trade negotiations, planned to hike tariffs to 25% on $200 billion of Chinese imports late in the week. The overnight headlines throughout the week caused a total of three big gap-down openings in the five sessions. They were partially offset by rebounds inspired by several hopeful comments from Trump staffers. The S&P 500 Index (SPX) had its worst week this year, losing a little over 2%. The Dow Jones Industrial Average (DJIA) had a similar loss for the week. The NASDAQ Composite Index (COMP) ended the week a bit more than 3% below its previous Friday close.
I warned last week that, “If COMP and SPX take out their (previous) 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.” The big gap-down opening Monday dropped COMP and SPX back to, but not through, the previous week’s lows. SPX again held at the 2900 level. The averages recovered most of the morning markdown and ended the day with just small losses. Tuesday brought another gap-down opening, but this time those previous lows were quickly taken out. SPX sank below 2900 in the first hour of trading and spent the rest of the week in the 2800s. It dipped below the 2850 level in the early hours on both Thursday and Friday but closed above that level both days.
A modest rebound on Wednesday brought SPX back up to near 2900 before the averages skidded lower in the closing half-hour. Thursday and Friday mornings both brought more trade talk concern and new lows for the week early each day. It was nice to see the averages recover most of the early-Thursday losses later in the day. It was even better to see them rebound from the early-Friday losses to fractional gains for the day. The big Friday reversal was inspired by indications that the day’s trade talks had been “constructive,” and, as was the case a week ago, it was the reason for including the “maybe” qualifier in this week’s title.
Most international markets also had a bad week. China, no surprise, was one of the worst. One index of large-cap stocks there was down more than 6 ½% on the week. One popular measure of Emerging Market stocks fell more than 5%. Only Gold, a couple currencies and a few fixed-income sectors had net gains for the week.
The May Day mayday was threatening to morph into a real Mayday! Mayday! While the Friday recovery lessened short-term fears, it alone probably wasn’t enough to eliminate the alarm. Things would be looking better if any of the individual leading sectors are giving the all-clear, but none have yet done so. For the past couple weeks, I’ve suggested watching the Financials and small-caps for biases that might sway the market. Where we were watching for follow-through gains in Financials, the sector was in the red all week and on Thursday it hit its lowest level in a month. The S&P Financials Sector Index fell about 2% for the week. The Russell 2000 Index of small-cap stocks (RUT) fell back to its 50-day and 200-day moving averages. It lost 2.3% for the week and now has a net loss for the past five weeks.
The three U.S. equity sectors that had been leading the market through the first four months of the year, Consumer Discretionary, Industrials and Technology were among the four poorest performing sectors last week. Both Consumer Discretionary and Technology fell all the way back to their 50-day moving averages before finding support. Net for the week, those sectors lost 2.3% and 3.4% respectively. The NYSE FANG-Plus Index, which had rallied more than 35% from its Christmas Eve low to its high a week ago, was snake-bitten with more than a 5 ½% loss last week. It was down all five days last week and reached its lowest level since late-March.
For the past few weeks, I have cautioned that, with the averages back at or near all-time highs, it was probably not a good time to be swinging for the fences. To that warning I would now add that it’s probably too soon to be rushing in to buy the dip. While I have no reason at this stage to believe that the current phase is anything more than a timeout, the deterioration in the leading sectors suggests that this current pullback will likely go a little deeper and a little longer. If this week brings sustained trading below 2850 on SPX, then the pullback could extend to the 2780-2800 area. Such a decline wouldn’t do much to damage the longer uptrend, but it would be important for the index to hold no lower than that range.
As was the case a week ago, we should expect markets to be atwitter over trade talk headlines through the week ahead. Economic reports on Wednesday and Thursday seem to be the only ones scheduled this week that have the potential to sway markets.
|Tuesday 5/14/2019||Import and Export Prices, Imports, M/M||+0.6%||+0.7%|
|Import and Export Prices, Exports, M/M||+0.7%|
|Wednesday 5/15/2019||Retail Sales, M/M||+1.6%||+0.3%|
|Retail Sales, less Autos & Gas, M/M||+0.9%||+0.4%|
|Empire State Manufacturing Survey||10.1||9.9|
|Industrial Production, Production, M/M||-0.1%||0.0%|
|Industrial Production, Manufacturing, M/M||0.0%||+0.1%|
|Business Inventories, M/M||+0.3%||0.0|
|Housing Market Index||63|
|Thursday 5/16/2019||Housing Starts, SAAR||1.139mm||1.200mm|
|Philadelphia Fed Business Outlook Survey||8.5||9.3|
|Friday 5/17/2019||Consumer Sentiment||97.2||97.5|
|May Options Expiration|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market