By Pete Biebel, Senior Vice PresidentPrint This Post
Following a fairly lousy month of May, stocks ripped higher through the first week of June. It was a welcome change of direction. The S&P 500 Index (SPX) didn’t do so well in the previous month. It touched a new all-time high early in the day on May 1st, but that turned into a key reversal day with the index closing near its lows of the day and below the low of the previous day. Stocks spent the balance of that month heading south from there. All the major averages ended May at their lows of the month and at their lowest levels in about three months. Much of the blame for the weakness that month went to the suddenly increasing threat of a trade war with China.
Thankfully, stocks turned over a new leaf last week as the calendar turned to the month of June. In addition to renewed optimism for trade-talk progress, stocks also got a tailwind from the increasingly dovish incantations from several FOMC voting members. SPX jumped 4.4% for the week and recovered about 60% of its May loss over those five days. In what is likely a very rare feat, more than 95% of the component stocks in SPX had a net gain for the week. The Dow Jones Industrial Average (DJIA) gained 4.7% and both it and SPX are back up to very near their 50-day moving averages. The NASDAQ Composite Index (COMP) managed a respectable though relatively lethargic 3.9% net increase for the week. For most of the indices, it was their best week since the big November rebound rally that preceded the December market meltdown.
So, after a miserable May, last week’s big rally has us asking all the same questions that we posed during the market’s October and November rebounds last year. Back then we were reminded that many of the market’s steepest rallies are temporary rebounds in continuing downtrends. Like then, things were looking pretty bleak just before the rally began. Last fall, SPX had three impressive short-term rallies from what then seemed to be the nadir of bleakness. In each case SPX rallied beyond its 200-day moving average but each time for just one day. The first time was on was news from China. The second rebound peaked on the day after the mid-term elections (the election results were as expected, yet the market gapped higher in a last gasp rally attempt). The third rebound rally ended on the blow-off opening on Monday December 3rd following the G20 weekend conference. Each case turned out to be a trap for the bulls.
I’m not saying that this rally is another bull-trap, just that it could be. There are several factors we can watch in the week ahead that could tip the scales one way or the other. The first of those is the price levels of the broad indices with respect to their moving averages. In that regard, last week’s rally is already looking better than any of last fall’s rebounds. Where the late-2018 rebounds in SPX all stalled at the 200-day moving average, last week’s rally not only quickly reclaimed that level, but also continued well beyond it. The next key level is the 50-day moving average, which coincidentally, is right where SPX ended last week. If SPX can sustain trading above that level (2875) this week, then the odds that the short-term correction has ended would greatly increase.
Another factor could be the relative performance of growth-oriented sectors like technology versus more defensive sectors like real estate, staples and utilities. Those three sectors have all climb to new all-time highs and are well above the levels of their late-2018 highs. Conversely, the rebounds in the broad technology sector and subsectors like the NYSE FANGplus Index, semiconductors and cloud computing have been far smaller. So far, they’ve only recovered a small portion of their May losses. We’ll need to see much better performance from those groups, and soon, if the current rally is going to be able to continue.
Another likely tell could be the performance, or lack thereof, in small-cap stocks. The Russell 2000 Index (RUT) fell back below its 200-day moving average in early-May, yet, despite last week’s 3.3% gain, RUT is still about 2% below that key level. Last October, about a month after RUT’s all-time high and just days after DJIA hit what is still its all-time high, my article “Lifting the Veil” suggested that the new highs in DJIA were masking the deterioration in the broader market as evidenced in the weakness in small-cap and technology stocks. That may again be the case this time around. Unless RUT can rally back above its 200-day average, the health of the current rebound rally will remain in question.
The increasing potential for one or more interest rate cuts by the Fed, combined with poorer than expected economic news extended the rally in Treasury Notes and Bonds. The yield on the benchmark Ten-Year Treasury Notes fell from about 2.75% to 2.14% during May and continued lower last week to 2.085%, their lowest yield in more than a year-and-a-half. Last week, the declining interest rates finally were reflected in weakness in the U.S. Dollar. The strong Dollar had relegated many foreign currency and commodity sectors to the bottom of the year-to-date performance rankings. The Wall Street Journal U.S. Dollar Index, which hit a two-year high in late-May, slipped about 1 ½% last week. That Dollar weakness was reflected in rare rallies in precious metals and some base metals.
Stronger prices for metals helped launch the S&P Basic Materials Sector Index to a whopping 9+% gain for the week. That vaulted the index to the upper boundary of its 17-month declining trend channel. While it might be nice to see that sector rally through that band and continue higher, doing so wouldn’t necessarily be good news for the overall market. Precious metal prices are likely to only continue higher if U.S. Dollar weakness persists, and persistent Dollar weakness would likely be a symptom of deteriorating economic health.
On a longer-term basis, we can watch two price levels on SPX as signposts marking the market’s future course. On the upper end, watch the 2925 level. Even reaching that level would pretty much confirm that the May rout was just a short-term timeout. Clearing 2925 would likely be followed by new highs though probably not much beyond the 3025 level. Heading the other direction, the 2750-2775 area would be critical. Even reaching that area would strongly suggest that the early-June rally was indeed a bull-trap. Breaking below May’s closing level of 2752 would likely be followed by at least an additional 3 to 4% decline.
This week’s economic report calendar doesn’t include any big potential catalysts. The PPI and CPI numbers would have to miss by a mile to cause much of a reaction. The Retail Sales numbers, while useful data, aren’t likely to provoke much of a market reaction. We have a brand-new earnings season to look forward to over just the next few weeks.
|Monday 6/10/2019||JOLTS Job Openings||7.488mm||7.100mm|
|Tuesday 6/11/2019||NFIB Small Business Optimism Index||103.5||102.0|
|Producer Price Index-Final Demand, M/M||+0.2%||+0.1%|
|PPI-FD, less Food & Energy, M/M||+0.1%||+0.2%|
|Wednesday 6/12/2019||Consumer Price Index, M/M||+0.3%||+0.1%|
|CPI less Food & Energy, M/M||+0.1%||+0.2%|
|Thursday 6/13/2019||Initial Jobless Claims||+218K||+215K|
|Import and Export Prices, Import Prices, M/M||+0.2%||-0.3%|
|Import and Export Prices, Export Prices, M/M||+0.2%||+0.1%|
|Friday 6/14/2019||Retail Sales, M/M||-0.2%||+0.7%|
|Retail Sales, less Autos & Gas, M/M||-0.2%||+0.4%|
|Industrial Production, Production, M/M||-0.5%||+0.2%|
|Industrial Production, Manufacturing, M/M||-0.5%||+0.2%|
|Business Inventories, M/M||0.0%||+0.4%|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market