After a bad Friday on the 22nd the markets took a week off to consolidate. The headlines cooperated without any material events to push the markets in either direction. The China trade talks are still progressing although very slowly. Europe is melting down slowly ahead of the potential for a hard Brexit on April 12th. The US economics are fading from their recent highs but there is still no recession in sight.

The biggest challenge for the week was the yield on treasuries. The ten-year yield fell to 2.35% intraday on Wednesday that produce weakness in equities. When that 15-month low held we began to see equities firm up on Thursday, but volume was the lowest day of the year at 6.3 billion shares. Friday was better at 7.3 billion and internals were 2:1 advancers to decliners.

While falling interest rates are good for earnings the sharply rising dollar is negative. This is becoming a routine event for companies to complain about currency headwinds knocking 3-8% off their revenue. S&P companies derive 45% of their revenue from overseas and this is going to be a cloud over the Q1 earnings cycle.

Analysts are running around like their hair is on fire worried about the coming recession. While we will have one, it could still be years away. One indicator suggesting it will not come soon is the Dow Transports. The index bounced off support at 10,000 on Monday and never looked back. It the transportation sector is not in trouble; the economy is not in trouble.

Another indicator is the high yield market. The HYG ETF typically leads the equity market and we all hope that is the case today because the HYG is on fire. After a hiccup in December when the Fed was unsure of rate direction, the HYG ETF has exploded higher and is about to close at a 15-month high. That is bullish for equities.

Oil prices have held at $60 for the last week. They typically peak around Memorial Day and the trade sideways into early August. Crude cannot seem to break convincingly above the $60 level, but it will happen. It is only a matter of time. When this happens the energy sector will also move sharply higher.

Active rigs declined sharply for the fourth consecutive week with a drop of 10 rigs. Over the last four weeks rigs has declined by 10 or more three times. This will lift sentiment for oil prices. With Venezuelan exports racing to zero that will remove another 900,000 bpd from the market over the next couple months.

With the S&P finally blowing through resistance at 2,815 on Friday, it should be no surprise that the A/D line set a new high. This strength is very bullish for sentiment even if the indexes are still a little choppy.

The chip sector hit a 52-week high the prior Thursday then crashed on Friday. The Semiconductor Index was unable to mount a rally all week and hit a two-week low on Thursday. There was some short covering on Friday but resistance at 1,400 is holding firm. Without the chip sector contributing the Nasdaq is going to be struggling to move higher. The FANG stocks were also lackluster for the week and that was a drag on the Nasdaq.

The small cap Russell 2000 tried to rally the last three days, but Friday was a weak 4 points. The small caps are supposed to lead the market, but they are in a very bearish pattern of lower highs, lower lows and below downtrend resistance.

The Dow is facing an uphill battle with resistance that corresponds with the same pattern on the Russell. Fortunately, the selling in Boeing may be over and that is the one stock that could power the Dow through the 26,000-26,191 resistance range. Boeing is high dollar and moves in big surges. Boeing subtracted more than 500 points from the Dow in its latest crash and could easily add 250-300 points back very quickly.

Volatility is fading after the sharp spike the prior Friday. This will calm investor nerves even though it suggests complacency. The market is typically positive over the next three weeks and we could see a new 5-month low.

I remain cautious on the broader market because we cannot seem to maintain a positive trend. There are too many headlines for investors to remain bullish in front of a weak quarter for earnings. The current forecast is for a decline of -1.9%. That is not the end of the world and as usual everything will depend on guidance for Q2 and the rest of the year.

Watch the Russell and Boeing for directional clues.

Enter passively and exit aggressively!

Jim Brown

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