Uncategorized, Weekly Update

Markets Take a Breather


Published March 8, 2019


After a 10-week rebound since the Christmas Eve bust, stock bulls have paused to take a break. They’ve done so right at 2800 on the S&P 500 and, coincidentally(?), just after recovering that December swoon (and hardly a penny more). In other words, the fear that gripped markets in December proved unfounded in January/February. We are now back to considering the first market drop in October that kick-started an ugly period for stocks and many calls of a new bear market. Will stocks recover the October decline as well?

Will market recover the October decline?

The index has quickly dropped back to an important test of whether this market has really fought off the bearish ways of 4th quarter 2018. We see below the weekly chart and the key supporting role of the 40-week moving average (note: almost identical to the 200-day moving average which is so often referenced).

40-week moving average

To embolden the bulls, we would want to see the 200-day/40-week moving average stand firm. Doing so would encourage the skeptics, of which there are very many, that stocks might have a shot at climbing to new high ground.

A firm stand might reverse a weak trend in money coming into the stock market. Flows of money INTO stocks has been a net negative for nine months now (red box below). Even with a strong January performance in stocks, money merely STOPPED FLOWING OUT. There are many, many factors at work here, of course, including demographics – retired folks might prefer income-generating bonds, for example. Nevertheless, the recent trend has not been one of unbridled enthusiasm for stocks.

Flows of money INTO stocks has been a net negative for nine months

We will see how this progresses. For now, a pause in the market after such a rebound is to be expected. The market has recovered on perceptions of a benign Fed and a positive outcome in the China-U.S. trade discussions. Left to ponder now is the global economy itself, which we know is slowing. How much and how fast that slowdown are the questions investors will be turning their attention toward.

Market Update

Stocks finally succumbed to a bit of a pause after a 10-week burst recovering from the October/December 2018 slide. This pause occurs as indexes wrestle with key technical levels. Monday’s trade initially brought another push higher on optimism for a China-U.S. trade deal. However, bulls lacked the firepower to sustain a further advance as profit-takers swooped in to reverse indexes over -1% lower. Stocks bounced back to a -0.4% dip for the day. Further selling was held in check Tuesday by good earnings reports from retailers Target (TGT) and Kohls (KSS). There was not an offsetting positive in Wednesday’s trade though as indexes slid -0.7% with the small-cap Russell 2000 plunging -2%. Healthcare and energy were notable in their weakness with oil prices under pressure from an increase in oil inventories while healthcare stocks have been hurt by concerns over an increase in drug price regulation. The pullback moved into a fourth straight day and accelerated Thursday as the European Central Bank (ECB) lowered their economic growth outlook for Europe to a meager 1.1%. It is notable that the ECB’s prior forecast of 1.7% growth was delivered only three months ago. So the deterioration in outlook unnerved investors. Stocks fell -0.8% Thursday. A continued fall Friday on a much weaker than expected monthly jobs report. Stocks slumped as much as -1% before buyers stepped in to close the gap to a very modest -0.2%. It remains notable that after a beginning-of-March lift in interest rates, they have slid back to their recent lows. Falling interest rates, which means investors are buying bonds, are not indicative of investor optimism.

Stocks finally reached a level where sellers emerged this week. The S&P 500 (SPY) closed down -2.13% while the Nasdaq 100 (QQQ) was off -1.85%. The small-cap Russell 2000, (IWM) which has led the way so far this year, tumbled -4.17%.

Warm wishes and until next week.