After five weeks of market gains, the market paused for a rest. The declines were not material and so far this has just been a period of consolidation rather than correction. The S&P dipped less than 2% at its lows and rallied into the close on Friday as traders positioned themselves for what could have been an event-filled weekend. The weekend ended calmly and the S&P futures are up slightly on Sunday evening.

I expect Monday and Tuesday to be positive as fund managers window dress their portfolios for the end of the quarter. The first three days of a new quarter are typically positive as new retirement funds are put to work.

After this week, we could see the markets weaken. The stocks buybacks that peak in Feb/Mar will be over and we will be in the quiet period before earnings where buybacks are prohibited. We are also entering into earnings warning season and with earnings expected to decline -8.7% in Q1 there could be a flurry of warnings once the quarter ends and companies are forced to accept the fact they did not receive critical orders. So far 78% of the companies giving guidance have issued negative warnings.

There may still be some pre-earnings bullishness but I would not expect it to last unless there is suddenly a flurry of companies severely beating the already lowered earnings estimates. That does happen. Sometimes estimates are so low that suddenly everyone is beating them and a market rally appears.

As I stated in prior commentaries the Dow and S&P have significant overhead resistance. Getting through the resistance on the S&P from 2,075 through 2,128 should be practically impossible in the current economic and geopolitical environment. Markets do break through resistance and make new highs all the time but doing it in this environment would be exceptionally difficult. There is a year's worth of congestive resistance since last May and that is going to be very difficult to break.

The Dow has rebounded farther than the S&P and that means the Dow will hit critical resistance first and there is plenty of resistance waiting. It is extremely unlikely the Dow will just cruise through that highlighted area of resistance without seeing some significant profit taking. That represents serious congestion and as you can see by the chart it has been with us for most of last year around the 18,000 level.

The Q1 earnings cycle should be market negative. On Friday, FactSet predicted Q1 S&P earnings will decline -8.7% and it will be the first time since 2008/2009 that earnings have declined for four consecutive quarters. On December 31st, the estimate for Q1 was for earnings growth of +0.3%. So far of the 118 S&P companies that have issued guidance for Q1, 78% or 92 companies have lowered guidance. Only 26 companies have issued positive guidance.

With the negative catalysts headed our way we could see the Sell in May cycle begin earlier than normal and be stronger than normal. With the various Fed heads talking about rate hikes at the April 26th meeting we could see investors decide to exit early rather than wait for May.

The economic calendar for next week is headlined by the employment reports. March has a record of missing estimates and that would be a good thing ahead of the April Fed meeting. If we were to get a blowout on the Nonfarm Payroll report of 250,000 jobs or more it would almost guarantee an April rate hike.

If the market begins to behave as expected I am going to begin thinning down the portfolio in the weeks ahead. If the market rolls over we can always take profits and look to buy back in on a dip. We do not need to leave ourselves exposed with long positions just because they do not expire for 9 more months. We can always be proactive to what we expect and reactive to what the market gives us.

Jim Brown

Send Jim an email