I don't know if we should be worried, but a trend is about to be broken.
The S&P futures are actually positive on Sunday evening and there is a distinct lack of negative headlines. The Super Bowl must have everyone's attention because the futures have been hovering at +3 for several hours with no volatility.
I would not complain about a week with positive futures on a Monday morning. That would be especially true this week with the major indexes right at strong resistance.
We have seen six consecutive weeks of gains and I am concerned we are about to reach a turning point. I believe the expectations for a trade deal with China is supporting the market. When that happens we could see a sell the news event after a short move higher.
As I have warned over the last couple weeks the forecast for Q1 earnings growth is rapidly declining. It will probably turn negative this week and normally that would be a rally killer. So far, investors appear unconcerned but I am betting they will suddenly wake up once the China trade meeting is over at the end of February. Personally, I would be surprised if we actually made it that far without some market weakness. February expiration week is normally when the market turns south if earnings are disappointing.
The market has continued to move higher despite the weaker than expected earnings news. The S&P finally made it through the resistance at 2,650 and closed just over resistance at 2,700. The 100-day average at 2,710 is current resistance but the 2,700 level is still in play. The next 100 points could be tough, but the 2800-2815 level is the clear target and that will be the next goal.
The Dow closed positive solely on the strength of the earnings winners from Friday. Chevron, Exxon and Merck added 57 points and Wednesday's winner Visa added 34 points. Note that prior winners from several days ago, CAT, MCD, MSFT and MMM were at the bottom of the list with post earnings depression.
The Dow gain of 64 points was just enough to close the index over 25,000 and the 100-day and 200-day at 24,986. If the Dow can hold these gains over those levels, it would be very bullish. Should it drop back below 25,000 the round number resistance would gain strength. I believe Disney is the only Dow component to report next week.
Amazon was the big drag on the Nasdaq with the $92 decline erasing 37 points from the Nasdaq index. It was the only stock to trade with a double-digit gain or loss. The index has round number resistance at 7,300 and the high for the day was 7299.94. You cannot get much closer than that.
The 10% correction level is 7,298 and the 100-day at 7,281. Alphabet (GOOGL) is the big dog reporting on Monday and they are expected to beat estimates. Whether the stock will rally is of course unknown. Since there are two $1,100 Google stocks, their earnings impact is doubled. Every $1 move in the stock is worth about a quarter of a Nasdaq point. A $12 move in each stock ($24) would be the equivalent of 6 points on the Nasdaq. A $10 move in Amazon is worth 4 Nasdaq points.
The Russell 2000 finally pushed through resistance at 1,493 and even closed over 1,500. However, there is a real blockade at 1,520 where multiple resistance levels converge. With small cap earnings still a week away there may be enough interest to keep the index moving higher to that 1,520 level.
The frequency of economic reports declines sharply next week as the backlog of missed reports dwindles. The ISM Nonmanufacturing and Factory orders are the most important reports.
Fed Chair Powell will speak on Wednesday and that will always be important for the market. If he is smart, he will try to avoid any market moving comments and not disrupt the current rally.
The State of the Union is Tuesday evening and that is sure to touch on a lot of topics and further increase political divisiveness. Ironically, the topic of the speech is supposedly "Unity." This will be the full use of the bully pulpit in a last-ditch effort to get funding for border security before being forced to declare a national emergency. Republicans will be cheering, and democrats will be putting their lawyers phone numbers on speed dial in case it actually happens. The speech should not have any material impact on the market.
Some 234 S&P companies have reported earnings with the current blended forecast for Q4 at 15.5% and 6.2% revenue growth. Unfortunately, the forecast for Q1 is dropping rapidly. Last month the forecast was for 8% growth and that has declined to only 0.7% growth. Net income estimates have turned negative at -1.6% and dropping sharply. This is going to get the market's attention very soon and it may not be pretty. If earnings are declining, the "E" in PE, then prices "P" will also decline.
This week will see 97 S&P companies report. As you can see by the graphic below the number of high-profile companies has shrunk significantly. The earnings peak was last week, and it is downhill from here. There are still a lot of big cap companies to report but they are not names you hear every day. We are moving into mid-cap week and next week we will see the small cap sector begin to report.
We are nearing the point in the cycle where post earnings depression will begin to appear. We are already seeing it in the Dow, and we could see it in the Nasdaq next week. However, it is normally expiration week when the weakness really begins to appear.
LEAPS are a long term investment. I try not to put stop losses on them because of the potential for market volatility. However, over the next couple of weeks I will be adding some stops to take us out of the market really rolls over like some analysts expect. Back on October 1st, the average 2019 S&P target of 46 analysts was 3,035. That has declined as of last Monday to 2,750 and only about 44 points from Friday's close. Nobody expects the S&P to just rally to that level and die. They expect moves between 2800-2900 and lows in the 2500 range. Obviously, nobody has a crystal ball, and everyone has a different opinion. The bottom line here is that almost nobody is expecting new highs in 2019. On a contrarian basis that might be bullish because the market normally does the opposite of what most people think. Markets love to climb that wall of worry.
Enter passively and exit aggressively!
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