The major indexes barely moved off the flat line for the week as consolidation appeared.
Major resistance was hit the prior week and investors used the opportunity to consolidate positions. A late week rebound brought the indexes back to the flat line and just under critical resistance. When you consider we have had 10-weeks of gains of around 20% on the indexes, it is a wonder we did not have a material decline.
As I stated in the market commentary, I believe investors are still hoping for a miracle rally after a trade agreement is signed. I also feel they will be badly disappointed by a sell the news bout of profit taking.
However, for next week, we should continue to melt up slowly. The end of February weakness is over, there are only four weeks left in Q1 and investors can use those weeks to play with Uncle Sam's money before they need to cash out to pay the tax bill in early April. Investors are more than likely going to remain invested until the trade agreement is signed and hope there is a spike to the prior highs where they can exit.
While the major indexes flatlined for the week the A/D line closed at a new high. The big cap stocks were choppy but the midcaps and techs were still showing some gains. The big caps are suffering from China fatigue and post earnings depression. The tariff sensitive stocks have been up and down so many times on headlines, the excitement has worn off.
Helping to lift the S&P and Nasdaq was the biotech sector. The $BTK closed at a four-month high on Wednesday and only one point lower on Friday. The Biotech Index has exceeded the same relative resistance that is still holding back the S&P and Nasdaq. This index could soon retest its highs.
The Dow Transports stumbled for the week after Delta (DAL) and American (AAL) were downgraded due to weakness in the global economy. The downgrade was strange because they maintained a buy on United (UAL) and United has the most exposure to overseas weakness.
The transports fell back to prior resistance as support at 10,450 but with rising oil prices over the next month, we could see further weakness here.
The chip sector was a drag on the Nasdaq after hitting a four-month high on Monday. The $SOX dropped back to consolidate around the 1,350-level midweek before rebounding slightly on Friday. Chip earnings are mostly behind us, but Broadcom reports the following week. That could be a market mover.
The energy sector was no help. Despite mostly good earnings and rising oil prices the sector was relatively dormant for the week. The XLE held over support at $65. The sector should be poised for future gains because oil prices normally peak between Memorial Day and July 4th then fade into Labor Day, then decline. This means energy stocks should rally into the May period. On the chart below the pattern is clearly visible.
The banking sector is up 23% since Christmas but the gains were paused last week. With the Fed on hold on rate hikes, the banks are over bought for the current conditions. Weak economics and the slowing housing sector could weigh on profits.
The Nasdaq was struggling because of the mixed performance of the FANG stocks. Two traded lower, two traded higher. Together they kept the Nasdaq from making a directional move. Apple, the extra A in FAANG, was flat at $175 on worries about future products and shrinking market share. With those five stocks acting as anchors it was surprising to see the Nasdaq post a 60-point gain for the week. However, the biotechs appeared to have taken a leadership role away from the FAANG stocks.
The Russell 2000 actually took over the leadership role from the Dow after being the laggard for months. This is very market positive because it confirms breadth and sentiment.
I could go on with the supporting cast of characters, but the bottom line is the 2,815 level on the S&P. This was strong resistance in Oct/Nov and a breakout over that level this week could cause some significant short covering and price chasing back to the prior highs at 2,930. I am concerned this could turn into a double top formation given the decline in Q1 earnings and the potential sell the news event on the China trade agreement.
Note the MACD, RSI and CCI all started to roll over last week. They are not critical yet but one more week of consolidation could suggest a new trend ahead.
I am recommending caution in the weeks ahead. A negative trade headline could appear at any time and the market would react negatively. Without a steady stream of positive earnings reports to provide support, the post earnings depression cycle will intensify but it should be nearing completion on the early reporting big caps that move the market. Depression in the mid and small caps could hold the market back but is not likely to cause a significant drop. As long as there is the possibility of a China trade deal, we should continue to move slowly higher. Once that event passes, I would look to take some cash off the table.
Enter passively and exit aggressively!
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