- Benjamin F. Edwards - https://benjaminfedwards.com -

The More, The Murkier

By Pete Biebel, Senior Vice President

The market’s post-Christmas rebound continued last week.  The major averages all tacked on about 1 ½% give or take; they all made new rebound highs.  The Dow Jones Industrial Average (DJIA) even managed to end the week back above its 200-day moving average for the first time in two months.  The extremely negative momentum at the December lows suggested that those levels would likely be revisited following whatever oversold bounce the market might muster.  Yet, with each additional week of higher prices, the potential for testing the December lows becomes more and more clouded.  The more the market rallies, the murkier the theory of a test of the lows becomes.

Early last week, it looked as though the rally was finished.  Stocks gapped down Monday morning.  Several negative reactions to earnings news were largely responsible for the weaker opening.  The averages were all showing losses of about 1 ½% within the first few hours of trading.  Thankfully those morning lows turned out to be the lows for the week.  About half of the morning losses were recovered in an afternoon bounce.  Again, on Tuesday, earnings news dominated market action.  The S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) were slightly lower on the day while DJIA chalked up a small gain.  In the end, Tuesday was a fairly quiet, narrow-range day as traders awaited the market’s reaction to the Fed meeting announcement the following afternoon.

Several more positive earnings surprises helped the averages vault higher on Wednesday morning.  The early gains held as the market drifted sideways counting the minutes until the Fed statement.  The Fed’s market-friendly announcement at 2:00 EST inspired another steep rally that lifted the averages above the prior week’s highs.  More positive earnings surprises pushed the averages even higher Thursday morning.

The week went out with a whimper on Friday with a quiet, narrow-range day.  While the averages ended near their highs of the week, Friday was the first day in weeks that the averages ended the session much closer to the lows of the day than the highs. That’s something that has happened fewer than a handful of times in the 26 sessions since Christmas.  We’ll continue to watch for closes near the low of the day and reversals after early gains as signs that the rally is running out of steam.

All eleven S&P industry sectors had net gains for the week.  Seven of them were up by more than 2%.  Five weeks into the New Year, Energy leads the U.S. equity sectors with a gain of just over 13%.  The Industrials sector is second-best with almost a 13% gain year-to-date.  So far this year, the U.S. stock market has easily outperformed other broad sectors like fixed-income, international developed equity markets, currencies and commodities.  The only markets that have challenged U.S. stocks this year have been international emerging markets.  Stock indices in Brazil, China and Egypt along with the overall Emerging Market index have gains of from about 9% to nearly 20% year-to-date.

Another big positive week this week could put the rebound over the top and eliminate the murk.  SPX, which ended last week near 2707, will likely encounter stiff resistance in the 2715 – 2740 range.  If it can somehow climb above 2750 and stay there, that would greatly reduce the prospects for a test of the lows.  If the averages do retrace a bit this week, SPX could dip back to around 2650 without hurting its intermediate-term uptrend.  Falling much below 2620 would be a troubling development and falling much below 2600 would suggest that the rebound rally had run its course.

With the Fed having done all it can do to help the stock market, developments in a potential trade war will probably be the biggest random catalyst in the weeks ahead.  This week will bring fewer earnings announcements than last week, but it is nevertheless still a pretty long list.  Several big-name internet companies report early in the week, while late-week brings a bevy of biotech and pharma company reports.  Positive earnings surprises have been a big force behind the market’s continuing rebound; more good surprises this week could mean more rally and murkier prospects for trip back to the December lows.

Date Report Previous Consensus
Monday 2/4/2019 Motor Vehicle Sales 17.3mm
Factory Orders, M/M -2.1% +0.3%
Tuesday 2/5/2019 PMI Services Index 54.4  54.2
ISM Non-Manufacturing Index 57.6  57.1
Wednesday 2/6/2019 International Trade, Trade Deficit $55.5B $54.0B
Non-Farm Productivity, Q/Q, SAAR +2.3%  +1.6%
Unit Labor Costs, Q/Q, SAAR +0.9%  +1.7%
Thursday 2/7/2019 Initial Jobless Claim  253K 223K

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