Introduction

The first quarter ended on a high note and that's a good sign. When the first quarter is good the rest of the year is usually pretty good too. This means the S&P 500 is likely to end the year at this level or higher, what it doesn't mean is that the market will keep moving up the rest of the year. The stock market has been in a giant, secular, rotation and I don't think that is over. As optimistic as the equities market is there is a lot of uncertainty and slowing growth is still a major theme.

Market Statistics


Trade is the #1 source of market uncertainty and trade relations with China are at the top of the list. With Mnuchin and Lighthizer in China this week I'm surprised there weren't more headlines on Friday. Regardless, the latest developments include China's 'historic' concessions on tech, Premier Li Keqiang's pledge to open China's financial markets, and comments from the Treasury Secretary to the effect his working-dinner with Vice Premier Liu He was productive. These events are positive, they point to a deal but still aren't yet a deal. Kudlow says the market shouldn't be focusing on a timeline, it could be weeks or months, and I think he's right.

In other trade news, the U.S. has still not reached a deal with the EU and the USMCA is yet to be ratified. A Trans-Atlantic trade deal is expected by the end of the year, the USMCA will get approved when Congress gets around to it. Because the USMCA still faces opposition it won't likely pass before late summer.

The yield on the 10-year Treasury fell to it's lowest level in years and inverted the yield curve for the first time in a decade. This is a warning sign of possible inflation but more a symptom of the environment than a cause of a recession. The signal it's flashing is a warning, a warning to the market and to world leaders that a recession is inevitable if trade relations can't be normalized. Until then the status quo reigns supreme and in that paradigm, the U.S. and global growth slow but remains positive well into the future.


The final revision for Q4 GDP came in a hair light at 2.2%. That, along with some light data this quarter, points to further slowing in the first quarter. The Atlanta Fed's GDPNow estimate concurs with this outlook but it has been rising over the past few weeks. The latest revision, Friday, March 29, has 1st quarter GDP near 1.75% and climbing. If this figure continues to climb, and the actual results come close to the estimate, the FOMC's 2.1% target for the year could be light.


Inflation data continues to remain tame. Last week we got the January read on PCE prices and they grew at a much weaker 1.4% than expected. At the headline level, consumer-level inflation has made a sharp retreat from its June 2018 high while core consumer inflation has subsided a bit less. Either way, you look at it though, consumer-level inflation is well below the FOMC's 2.0% target and does not indicate a need for a rate hike. If anything the consumer inflation data suggests the FOMC should cut rates.

Not surprisingly, Trump supporters like Larry Kudlow are calling for the FOMC to cut rates immediately. I doubt the FOMC will listen to the White House on this matter but they will likely cut rates before the end of the year unless the trajectory of inflation changes. According to the FedWatch Tool, Fed Futures are pricing in a near 70% chance rates will be cut by December.



The Economy

Last week's economic calendar wasn't too exciting. The labor data, jobless claims, shows flattening in the trend as labor market tightening stabilizes. The labor data may be throwing off a warning but for now, all looks well but I don't expect much more in the way of improvement. The market is still strong, wage gains are still good, but the days of tightening may be behind us.

In other data, the housing data was mixed but I will say mixed with signs this year could be a good year for the home builders. The existing sales, permits, and starts data was all a bit on the light side but mortgage apps and new homes sales were reported at 667,000. This is 4.9% above January's figure, 0.6% higher YOY, and the highest level in nearly a year. With mortgage apps hitting all-time highs (driven by lower interest rates) and growing strongly week over week for over a month we may see permits and starts improve, and new homes sales soar as pent up demand is unleashed.


Next week's economic calendar is a little fuller. Being the start of the new month we'll get the labor-bundle which includes the ADP report, the Challenger report on planned layoffs, weekly jobless claims, and the NFP/unemployment/hourly wages. Along with this are the ISM services (employment index included), durable goods/core capex, construction spending, and retail sales. Most of the data is for February, some are for March, all is for the 1st quarter, and all are important in light of their impact on labor markets, the consumer, and general economic activity in the U.S


The earnings outlook is still in transition but it looks like, once we get past the first quarter, things will brighten up considerably. The first quarter estimate fell another -0.20% in the last week putting it at 3.9%. At this level, the best we can expect is for the final rate to be about 0.0% unless the S&P 500 pulls out some big surprises. So far 20 companies in the index have reported and the results are about average, 17 have beaten EPS consensus and 11 have beaten revenue consensus. The companies with the most exposure overseas will have the worst showing while those with the least the best, a situation likely to cause volatility and spark rotation.


Looking forward there are a couple of positives to keep in mind about earnings growth and this cycle's results. The first is that the 1st quarter is going to be the bottom of the earnings slowdown. After this quarter growth is expected to resume expansion and acceleration. The outlook for the 2nd quarter is still dangerously close to 0.0% and in danger of turning negative but, so long as it stays above 3.5% or so we can safely assume it will be positive when the smoke clears.

From that point on, post 2nd quarter cycle, earnings growth is expected to accelerate over the 4 to 6 quarters topping out above 12%. Estimates for future quarters, specifically in 2019, have weakened considerably from their highs but have stabilized in recent weeks which is a good sign. Along with that, the estimates for 4th quarter growth went up an average 0.2% over the past week which I think is a really good sign. The risk is that 1st quarter results will weigh on the outlook, if that happens stock prices could suffer. At current prices, the S&P is trading just shy of the 5-year P/E and about as highly-valued for the past 5 years, if the outlook for earnings growth takes a beating, stock prices could easily correct to the December lows.


The Gold Index

Gold prices fell pretty hard this week after testing resistance repeatedly along the 2019 uptrend line. The spot price gave up nearly -1.75% and broke through the $1,300 level in the process. The metal may be heading down to set new lows but support is likely near $1,280. One reason for gold's fall is this week's strengthening dollar but that support may be short-lived; the dollar is looking pretty range-bound with central banks around the world, including the FOMC, ratcheting down their 2019 growth outlooks one bank at a time. A break below $1,280 would be bearish for gold and may fall to $1,250, $1,225 and $1,200 in the near to short-term.


The Gold Miners ETF also fell in the last week shedding about -1.60%. The ETF didn't make it all the way to $23.50 before correcting and shows strong resistance at a lower level than before. The indicators are consistent with a peak in prices and suggest correction or consolidation will continue in the near to short-term. My targets for support are $22.00 and $21.50, a break below $21.50 would be bearish otherwise I expected range-bound trading.


The Oil Index

Oil prices moved higher this week despite fear of slowing global growth and demand worries. The OPEC tightening scheme, Russia's commitment to aid OPEC, sanctions against Iran and Venezuela, Venezuela's electricity problem were compounded by news from the U.S. The EIA says U.S. production edged lower in January, still 11.87 million barrels per day but lower, and Baker-Hughes says the rig count fell which are both bullish for oil prices. WTI spent most of the week within its near-term range but broke out on Friday to set a new high. The indicators are bullish and gaining strength so I do expect to see oil prices continue to rise.


The Oil Index did not move higher on Friday or for the week, really. The weekly candle is green with a long upper shadow showing resistance is still fierce at the 150-day EMA. The EMA may cap gains in the near-term but, with oil prices on the rise and earnings season at hand, I expect the outlook for earnings growth to rise and the index to rise with it. A break above 1,320/1,325 is the trigger I am looking for, once that is broken moves to 1,400 and 1,500 look likely.


In The News, Story Stocks and Earnings

Carmax was among the week's best performers after releasing earnings on Friday morning. The used-car dealer was able to post 5.9% YOY revenue growth despite a slowdown in auto markets. Revenue of $4.32 billion was shy of estimates but that didn't matter, pricing and conversion led to better than expected margins which more than offset the difference. EPS of $1.13 beat consensus by $0.10 and, along with plans for 2019, helped push the stock up 10% by the end of trading. The company is expecting to increase its Capex spending this year, open 13 new stores this year and next, and roll out the omnichannel experience to most customers by the end of next year.


Wells Fargo had an active on Friday after the announced retirement of Tim Sloan. Sloan has been with the bank for more than three decades and took over as CEO after the bogus-bank-account scandal in 2016. He says his retirement is effective June 31st but he's stepping down as CEO and board member immediately. Shares of the stock initially surged on the news but uncertainty outweighed any benefit the company may see. Wells Fargo says it will look outside the company for its new CEO. A flurry of up and downgrades followed the announcement, all citing how a new CEO from outside the company will help with regulatory issues. Those downgrading the stock say fundamental weakness makes it an inferior investment. Shares opened on Friday with a small gap and then fell hard to close with a loss of -1.5%.


Shares of Boeing have begun to move higher following the crash-induced correction. The stock advanced nearly 2.0% on Friday and set an almost-three-week high in the process. The company has a tentative agreement with the FAA on a fix for the anti-stall issue at the root of the 737 MAX problem. While a fix is good news for the future of 737 sales it does not protect the company from civil liability. The first of what are sure to be many lawsuits pertaining to the Ethiopa Air crash have already been filed and could cost the company billions.


The VIX moved lower on Friday and may move lower, but I still don't like the way it looks. The pattern traced out during March is a sign to me that something is up in the market and I am not sure what it is. At current levels, the index is consistent with rising index prices for the S&P 500 but there is a support target very close to Friday's low that could spark a rebound for fear. This level is near 13.40 and if confirmed as support could lead to a sharp increase in a near-term kind of way. A fall to new lows would be bullish.


The Indices

Despite my apprehensions, the indices had a good week; all the major indices were able to post gains and one posted gains above 3.5%. Even so, no index posted a new high and all show signs of resistance at established resistance targets.

The Dow Jones Transportation Average posted the largest weekly advance at 3.54%. The transports formed a strong weekly candle moving up from the 10,000 resistance. The move looks bullish and confirms support at a key level but met resistance near 10,450 where it has failed to advance for the past three weeks. The indicators are mixed, momentum is bullish but stochastic is moving lower following a bearish crossover, so the best I would expect in the next week is more sideways action with a possible test of resistance at or just above 10,450.


The Transports look a little better on the daily chart but only just. The index is moving up off of support and is supported by the indicators although the signal is less than perfect. While stochastic is firing what I would call an almost strong bullish crossover the index is still below resistance and MACD has yet to confirm. The upward movement could continue and surpass 10,450 but 10,500 and 10,650 are resistance targets that also need to be overcome.


The Dow Jones Industrial Average posted the second largest advance with a gain of 1.67%. The blue-chip index created a medium-sized weekly candle if you count the small gap that formed with Monday's open. The candle is moving up from support but the move doesn't look strong. The indicators are mixed, consistent with a peak, and suggest choppy range-bound trading in the near-term. If I were more bullish I might say they were set up to fire signals that would indicate a continuation of the V-Bottom rally. In the near-term resistance is at 26,000 and may cap gains. A move above that would be bullish but face additional resistance at the all-time high.


The blue-chips daily chart is likewise bullish but in a way that looks suspicious. The indicators are mixed and do not confirm last weeks advance which, along with the presence of resistance suggests range-bound trading. The index may continue to move higher but I'd like to see it close above 26,000 and more like 26,200 before getting bullish.


The S&P 500 advanced 1.20% in the last week forming a green candle to the side of several weeks price action. The index looks like it could go higher but choppy day to day action and the indicators suggest a top is forming. The indicators are consistent with consolidation if not correction and point to more sideways trading in the absence of market-moving news. If the index is able to move higher I would not chase prices, the next targets for resistance are very close at 2,875 and the all-time high.


The S&P 500 daily charts look about the same. The index is drifting higher but indications of weakness persist. The indicators are not bullish on this chart, at best stochastic shows a bounce from support within downtrend while MACD hovers in bear territory. If the index does move higher I would expect for resistance in the range of 2,850 to 2,875 to be strong.


The NASDAQ Composite gained 1.13% in today's trading. The tech-heavy index created a medium-sized green candle that, not counting last week's long upper shadow, forms an outside day pattern. This pattern is a sign of market exhaustion which is what I'm seeing in chart after chart. A move higher is possible but it would likely be the last gasp of the Vee-Bottom reversal that began in December. If the outside day is confirmed, a move to 7,500, 7,350 and 7,000 is possible.


The NASDAQ Composite bounced up on Friday but formed a weak candle within the recent consolidation range. It may move higher but the indicators are not bullish and resistance at 7,800 looks strong. A move above 7,800 could be bullish but if so, see paragraph above.


The market may move higher next week but that will depend on the news. The most important news will be on trade, after that bond rates maybe, and then economic data for sure. Regardless, there are a lot of reasons for the market to make some wild, possibly knee-jerk, moves in the next week so extra caution is a good idea. I still think the economy is fundamentally sound but the market is getting to be highly valued in a time of uncertainty. I remain firmly bullish for the long-term, we'll get a trade deal (maybe this year) and the global economy will continue to expand. In the near-term I think there is an underlying weakness in the market tied to earnings and signs of slowing economic growth so I am neutral, leaning toward bearish.

Remember, a hot first quarter usually means the year ends strong too, but it doesn't mean the market moves straight up all year. The major indices are up about 20% for the year and ripe for profit-taking.

Until then, remember the trend!

Thomas Hughes