Feb. 15, 2019 – Stocks quietly had a pretty good week this week. We say quietly because even though earnings season is wrapping up, and major indices all posted decent gains, the headlines, even in the financial press, were mostly focused elsewhere.
Earnings continue to be a mixed bag. By and large, the reports have been better than estimates, but analysts are now predicting a decline in earnings for the current quarter. There has even been speculation about an earnings recession, which would be two consecutive quarters of declining earnings, but given analysts’ propensity to undershoot actual results, we’d prefer to see a single quarter of earnings decline before we start speculating about a second.
The government shutdown saga came to an end today (the government is now funded through September), after the sides reached a deal during the week. We’re still getting data that was delayed by the last shutdown, and haven’t really been able to measure the effects of having the federal government closed for 35 days.
One of those delayed reports showed a sharp drop in retail sales in December. That did include a few days of shutdown, but the drop was sharp enough that the shutdown wasn’t likely the cause of the entire decline. Industrial production numbers for January that were released this morning also showed an unexpected decline. Neither of these data points on their own are overly worrisome, but a continued trend of weak data would be an unwelcome turn.
Some resolution to our other long-running news story would be a welcome turn, and could helps to erase, or at least diminish, some of the issues mentioned above. To that end, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer held another round of talks with Chinese officials this week. We are still extremely light on what, if any, specifics have been agreed to, but President Trump said this week that he would consider pushing back the implementation of new tariffs, currently scheduled for March 1, if progress was being made in talks. That condition is reportedly being met, so it seems likely at this point that we won’t see a sudden increase in import duties at the end of this month.
We discussed likely outcomes the trade talks last week, and in more depth the week before. At this point, it seems that everyone agrees that a memorandum of understanding is the likely outcome from these talks. This probably means both sides will agree to some concessions, but enforcement is likely to be weak to non-existent. China has abandoned MOUs before, so it wouldn’t be too surprising if they walked away from this deal if stopped being convenient.
Any agreement would be a positive for the economy and stocks in the short term as a reduction in tariffs and some clarity on trade policy in the future would be good for businesses. A deal that doesn’t address structural issues in China, such as intellectual property protections, won’t actually solve any of the long-term issues between the two countries, but if the re-negotiated NAFTA deal is any guide, Trump will consider any changes to the status quo a victory.
Trade is likely to remain in the news going forward as auto tariffs are potentially on the table soon.
The U.S. is also like to hit it’s statutory borrowing limit in the next few weeks, which will require the Treasury Department to take special measures until Congress can raise the debt ceiling.
All told this week, the S&P gained 2.3%, the Nadsaq rose 2.13%, and the Dow Jones added 2.94%.
The major indices have nearly erased all of what was lost in December and are approaching levels equal to where the heavy selling originally began. This week we will be looking at the abundance of support (dotted lines) the indices have crossed, as well as key levels of resistance (solid lines) the indices are still facing.
This week is quite significant for the S&P 500 (one-year chart). Crossing over the 200-day moving average (purple line) is a very positive sign, especially when the 200-day was running parallel with technical resistance at the 2,700 level. A pullback at that level, like we say last week, was very likely. The S&P has been so strong since late December, that it has only briefly dipped below its 8-day moving average (red line). The few times that it has,support from technical levels or support from moving averages has boosted it back to the upside. As the 8-day moving average began to squeeze the index around 2,740, a significant breakout was likely. Luckily, that breakout was to the upside. The biggest obstacle in front of the S&P is the dreaded 2,800 level. This level of resistance has plagued the S&P many times since the beginning of 2018, sending the index downward almost every time it encountered it. Should the S&P fall from here, it has many levels of support between 2,650 and 2,760, with major support from its 8, 20, 100, and 200-day averages.
The Nasdaq (3-month chart) struggled the most this week. The level of resistance around 7,425 proved to be a challenge. Once it overcame this level, it immediately faced the 200-day moving average. It was looking like the 200-day moving average may stall the Nasdaq, but some late-day strength on Friday gave the index enough strength to close above it, which is good. If the Nasdaq can hold above the 200-day next week, and even use it to push above resistance around 7,500, there is room to run before encountering heavy resistance again at 7,600. Like the S&P, the Nasdaq has earned itself many levels of support to help it in the event of a pullback.
Dow Jones Industrial Average
The buying into the close we saw Friday afternoon really helped the Dow Jones (six-month chart) as well, placing it above a level of resistance around 25,800. This is also very positive. The Dow has been so strong, we could see the index set new highs in the near future if strength like this continues. While there are scattered levels of resistance throughout, the biggest challenge for the Dow will be 26,200. If the Dow can overcome 26,200, new highs are well within reach. The Dow also has many levels of technical support, particularly between 24,800 and 25,400.
The Russell (one-year chart) is still the index with the most making up to do. It is the only index to still face the hurdle of the 200-day moving average. The resistance between 1,580 and 1,600 will be challenging for the Russell, but it has earned some solid support in its post-Christmas run. Breaking through the resistance around 1,550 is very positive. If the Russell can hold this level, it will be a great platform for the index to tackle the 200-day.