We have entered the post earnings depression phase for Q4. The last half of February is normally weak. Over the last seven days there was only one material gain. The markets are still trending higher, but momentum is fading. The turning point is normally expiration Friday. Since the 15th, the S&P has averaged less than 3 points per day.

Resistance at 2,815 is solid as is resistance at 26,191 on the Dow, 7,600 on the Nasdaq and 1,600 on the Russell. These are levels that held on the attempted rebounds in October and November. They may eventually break on expectations for a trade deal with China but today they are solid.

President Trump extended the March 1st escalation of tariffs on China. That was good for a temporary rally but it quickly faded. Investors want to believe there will be a trade deal but they are cautious. After nine weeks of gains are we really going to stretch the streak to ten weeks?

Economics have been mixed. Earnings have been mixed but forecasts are holding at -1% growth for Q1. Since the actual earnings are normally 3-4% higher by the end of the reporting period, the -1% decline in growth could be +3% growth before the reporting period is over. With current estimates for 3.4% earnings growth for Q2 it is not likely we are going to have an earnings recession.

There is just enough hope on earnings and trade to keep the market alive, but we are in the post earnings depression period. We should expect weakness and be happy if the rally continues higher.

However, I will continue to caution about the potential for a sell the news event on a China trade agreement. Regardless of what is agreed the mainstream press is going to beat it up. Negative news creates more views than positive news. In the current divisive political climate, the president will not get a win even if China agreed to drop all tariffs and buy $2 trillion in products from the US. It is just a fact of life not a political statement.

That means we could be setting up for the biggest sell the news event in recent memory. The last nine weeks of rally has been built on expectations for a positive outcome. Anything short of monumental could be seen as a sell the news event.

On the plus side, Fed Chair Powell, did everything he could to take the fed out of the picture in his speech on Tuesday. QE tightening or the reduction in the Fed's balance sheet could end this year and the Fed is not expecting any material inflation. They believe employment will continue to improve and the economy will only weaken slightly. If there was ever a Goldilocks speech by Powell, this was it. Yet, the market declined when it was over.

The lethargic market action over the last seven days culminated with a lackluster attempt to break resistance at 2,815 on the S&P. This is a critical level and once over it the next target is the September high at 2,930. That may not be as hard to break as 2,815 because the bulls will be stampeding after a break of the current resistance.

The Dow suffered after an earnings miss by Home Depot and double downgrade to sell on Caterpillar. The A/D was almost dead even, but the big losers outweighed the gainers. No Dow stock gained $1 or more. This is late February post earnings depression despite the positive Powell speech.

If the Nasdaq can get over 7,600 it has a clear shot to 8,000 and then solid resistance at the prior high at 8,109. The FAANG stocks were mostly positive but with only small gains. The worries over penalties for privacy violations and expenses for policing future issues are weighing on Facebook and Google. Apple is fighting the headline suggesting they will not have a 5G phone until late 2020 because of their current dependence on Intel for modems.

The small cap index was the biggest loser on Tuesday after bouncing off 1,600 on Monday. The Russell has had a great run but it may be tiring now that small cap earnings excitement has faded.

The calendar for Wednesday included International Trade, Factory Orders and Pending Home Sales. Thursday has the GDP revision for Q4 and Kansas Fed Manufacturing Survey. None of those are likely to move the market.

I would be cautious about being "too" long at this point until after the Chinese trade announcement, which could be several weeks away. Since the tariff deadline is off the table, this decision could drag out for longer than investors anticipated. When there was a March 1st deadline, there was something to plan around. Now there is only a tweet saying Trump and Xi "could" meet in March. That is a four-week window without a target date. Investors could get antsy. I would be cautious.

I apologize for the light commentary tonight. My son James is in the hospital receiving his fifth transfusion in two days after almost dying on Monday. My mental focus is not on the market, but I wanted to catch up this newsletter that was missed on Sunday. Thank you for your understanding.

Enter passively and exit aggressively!

Jim Brown

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