Introduction

There are reasons to believe 2019 could be a good year for stocks. Secular economic trends are positive, GDP and earnings growth are still on tap, share-buybacks and dividend increases are expected, and the FOMC is set to leave interest rates unchanged. If only trade with China could get settled 2019 could be a perfect year.

Trump says the market had a glitch in December and will fix itself once a trade deal comes to pass. What he needs to understand is that his trade shenanigans, however needed, are having an impact on the global economy and that is what caused the stock market to glitch. Yes, the market will bounce back and with a vengeance, once a deal is signed, probably sooner, and I'm sure Trump will take as much credit for that as he hasn't for causing the market to meltdown.

Wharton School of Business professor Jeremy Siegel thinks we could see the market rise as much as 15% over the next year and I think that is a low estimate. A move to retest the all-time highs is closer to 20% and that could easily come in the first half of the year. A move to new highs is not out of the question by the end of the year.


Slowing GDP growth and slowing earnings growth has caused the market to reevaluate valuations and to revalue the market based on future earnings potential. Now that equity valuations have returned to earth, currently at historically low levels relative to the S&P 500's earnings power, the market can turn its eye to the future and what it might bring. Based on the estimates we're looking at 4-6% earnings growth the first half of 2019 and then a sharp acceleration of earnings growth to over 10% by the end of the year, an acceleration that could easily fuel a rally in the mid to second half of 2019.

Market Statistics

Today's action was influenced by some weaker than expected PMI data from China and the EU. According to Caixin/Markit, China's manufacturing PMI fell to 49.7 from a previous 50.2 and into contraction for the first time in 19 months. The data reinforces the official PMI data released on Monday, data that showed China's manufacturing economy had been in contraction for two months. The difference between the two are often great but together the Official (large cap, state-owned/backed businesses) and the Caixin (small to mid-cap/private) PMI gives a pretty good indication of conditions in China and right now tariffs are hurting growth.

PMI in the EU was also weaker than expected but positive at 51.4. This shows ongoing expansion within the EU economy but at a slower pace than before, the same thing we're seeing around the world. On the trade front, China's President Xi hailed progress made on trade and US/Sino cooperative efforts over the past four decades. While there is hope we're on the upswing regarding the trade war we are far from the end. Countering Xi's remarks are those from Robert Lighthizer to Trump, don't accept empty promises, you may need to increase tariffs to get meaningful concessions from Xi.

Economic Calendar

The Economy

There was only one economic release today and that is the Markit manufacturing PMI which is released the day before our 'official' PMI reading. Markit says the US manufacturing economy is still expanding but at a slower pace than the month before. PMI is now at a 15 month low due to slowing new orders, slowing output, and slowing hiring. While this is a concern the most important factors are that manufacturing is still expanding, and PMI readings are high relative to long-term trend. We may be in a period of slowing but we are not in a contraction. If I remember correctly, this recovery has been spotty and hurky-jerky from the beginning so it's really no surprise we're experiencing some minor turbulence now; it'll most likely pass.


The Dollar Index

The Dollar Index got a big boost from today's data. Global PMI shows manufacturing activity is slowing around the world but has slowed the least, and remains the strongest, in the US. This data gives a reason for both the FOMC and all other central banks to back off of their rate-hiking, policy tightening agenda's and allow global economies to adjust to today's conditions. What this means for the DXY is a continuation of the trading range provided this week's data doesn't support the need for FOMC tightening.

As an added risk, Jerome Powell will be attending an economic conference on Friday. At the conference, he, and two former FOMC chairs (Bernanke and Yellen) will be discussing key economic events. After his last major appearance at the Economic Club of New York Powell's statements will be closely watched. The market will be looking for confirmation the FOMC is going to hold off on future rate hikes, anything the least bit hawkish has the potential to send the dollar skyrocketing. As it is now, there is very little chance of a rate hike at all next year, and a growing chance the FOMC will cut rates at least once by December.

The index gained close to 0.90% in today's session but remains firmly within the near-term trading range.


The Gold Index

Gold prices were relatively steady in today's session despite the move in the dollar. The spot price was up in early trading, set a new high, and then fell later in the day. The candle is small and potentially bearish but not strong and of little consequence overall. The indicators remain bullish so upward drift in prices is expected but there is a risk. The MACD is showing signs of peaking and divergence from the new high that suggests there is a limit to how high gold prices can go. My next target for resistance is near $1,300, a break above that could go to $1,310 or $1,325.


The Gold Miners ETF GDX tried to move higher in today's session but couldn't do it. The ETF moved up to touch resistance at the top of a near-term consolidation range that is beginning to look a bit like a rising wedge and not a bullish one. The price action is having a very hard time moving above $21 and the indicators don't look good, both are weak and suggest a correction is imminent, so a move higher is questionable at this point. A move up would have to break resistance at $21.50 to be of significance and that, I think, would require a jump in gold prices to accomplish.


The Oil Index

Oil prices went on a wild ride today, first down -3.0% and then up 3.0% as traders try to begin positioning for 2019. Among today's drivers is the start of OPEC's production cut. The cut is designed to create an appearance of global oil market tightening and has worked in the past. The trouble this time is that global growth outlook is under intense pressure and with it outlook for oil demand. And the US keeps on pumping. Whatever happens, WTI is now trading at $46.25 and indicated higher. The black gold may move up to retest resistance at $48 and possibly as high as $52 before resuming downward movement.


The Oil Index gained nearly 2.0% in today's session and looks like it wants to go higher. The sector may not have the support of triple-digit earnings growth anymore but it still has strong earnings, is buying back stock, and dividends are high. Integrated companies like Exxon, BP, and Shell are paying near 6.0% dividends which are attracting new money. The move higher may not last long, not without a move up in oil prices to support it, but a retest of 1,200 to 1,232 looks likely.


In The News, Story Stocks and Earnings

Tesla made the bears happy this morning when it released 4th quarter delivery figures. The company says it delivered 90,700 cars last quarter which is less than expected. Production of Model 3 was also a bit shy of expectations but, with the production of Model S and Model X vehicles, is on track to meet full-year production goals. Tesla also says it will be lowering the price of all three models by $2,000 to help offset the reduction of tax breaks in the US. Shares fell more than -7.0% in premarket trading but were able to catch a bid during the day to move up and reduce the loss to near -5.0%.


GM reports that it has sold a cumulative 200K electric vehicles and triggered the phase-out of tax credits that have until now helped fuel its sales. The credit, now at $7,500, will be cut in half come April and then in half again in October where it will remain for six months before phasing out entirely next April. Tesla reached its 200K cap earlier this year, Tesla and GM have lobbied Congress to extend the break which is intended to cover the difference in price between electric cars and similarly sized combustion engine vehicles. The loss of tax credits could impact sales of electric cars in the coming year, especially since gas prices are falling again. Shares of GM opened with a loss but were able to regain it and more before the close of the session.


Netflix was another stock to take a hit in today's session. The leader in streaming media had its price target downgraded by Suntrust analysts who think subscriber growth will fall short of expectations. The buy rating is held in place but the target was cut to $355 which is still a 30% upside from today's prices. The analyst says a strong mid-year slate of programming will help maintain business but meaningful improvements are not expected in the Q4 data. Shares of the stock opened with a loss but were able to claw their way back to break even and move higher to close with a gain near 0.75%.


Apple shares were halted in after-hours trading so the company could issue a guidance update. The company says it will miss revenue expectations by more than 6% due to slow sales in China, a weak round of iPhone upgrades (I got mine, buy one get one free iPhone X from Verizon), and the generally lousy backdrop for the business that is currently in effect. The news was not well received but is consistent with analysts warnings and other signs of slowing business around the world. Shares of the stock fell more than -6.0% in after-hours trading and likely to head lower in tomorrow's session.



The Indices

The indices began the day in the red and looked like 2019 would get off to a really bad start. The good news is that buyers were waiting to step in at the open and pushed stocks higher almost all day. The indices created green candles, set new near-term highs, and look like they could extend this bounce over the next few days.

The NASDAQ Composite was today's leader with a gain of 0.46%. The tech-heavy index may have trouble in tomorrow's session with Apple's after-hours warning but momentum is shifting to the upside and that may be enough to carry the index up to the next resistance target. The indicators are consistent with a bullish entry that is in line with the secular bull market but the signal is still early and weak. A move up may find resistance near the short-term moving average and the 7,000 level, a move above that could be bullish longer-term.


The Dow Jones Transportation Average posted the second largest gain for the first day of 2019, 0.34%. The transports created a medium sized candle that confirms support at the 9,000 level and suggests a move higher is on the way. The indicators are still weak but rolling into a bullish signal that will be in line with the secular trend once completed (if completed). A move higher may take the index up to 9,500 or 9,600, a break above that level could signal additional upside with targets near 10,500 or higher.


The S&P 500 posted the third largest advance in today's session with a gain of 0.12%. The broad market had been down more than -1.5% in early trading and was able to recover all of that loss. Today's candle is medium sized and green, it confirms the presence of support at the 2,500 level, and is supported by the indicators. The signal is still weak but both MACD and stochastic are showing bullish crossovers that are in line with the secular trend and suggest upward movement in prices is coming. A move up would confirm this outlook but resistance targets are close at hand. My first target for resistance is near 2,525, a move above that could go to 2,600.


The Dow Jones Industrial Average brings up the rear in today's session. The blue chips advanced a mere 0.08% but staged a 400-point day and created a medium-sized green candle in the process. The index is showing support at the 23,000 level and may move higher if it can surpass 23,350. The indicators are consistent with a bullish shift in momentum that is in line with prevailing trends so a move higher is expected. The next target for resistance, once 23,350 is broken, is near 25,000.


I have to be honest, it didn't look like 2019 was going to get off to a great start but that outlook changed almost as soon as the opening bell sounded. Today's action is not definitive, there are still a lot of hurdles to overcome, but it is a good sign that 2019 will be about buying equities rather than selling them.

The risks to the market are still present but so too are the drivers of the secular rally. The risks include Trump, growth outlook, earnings outlook, trade, and the FOMC. The drivers include share buybacks, dividend increases, and labor trends; I think the drivers are a far more powerful force. I am cautiously bullish for 2019 and long-term positions, I am also bullish for the near-term but even more cautious because you never know what tomorrow will bring.

Until then, remember the trend!

Thomas Hughes


 

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