My calls for caution, as it relates to US equity prices, appeared to have received a degree of confirmation at the conclusion of last week’s trading. All three major equity market indices posted modest weekly gains last week. However, early-week enthusiasm gave way to indecisive price action post-mid-week, as evidenced by the charts below. That indecisiveness was paired with declining volume—normally a sign that caution has crept into market psychology. We may well receive further vindication for a cautious outlook this week.
My call over the past two weeks for markets to be hemmed in to the upside also appeared to have borne fruit last week. As the charts below loosely illustrate, the 50 DMA of all three indices appears to be an increasingly important marker.
To call market direction this close to all-time highs is a bit of a challenge, but I do feel confident that upside remains limited in the near-term, while at the same time, the 200 DMA is a likely near-term target for the broader market. A successful re-test of the 200 DMA could well lead to a change in outlook. A failure at the 200 DMA on a retest would certainly call for a reassessment.
Last week’s modest gains were largely fueled by the perverse expectation that an accommodative Fed will provide downside risk protection for equities, in the event our economy runs up against meaningful headwinds in coming months and quarters. That thesis, that the Fed will provide investors cover, will receive some additional and needed clarity this week.
Several additional themes emerged last week that have the potential of disrupting what has come of the renewed sense of risk-on in recent weeks. A short list of concerns includes: concern over President Trump and China’s Xi relationship; oil tankers being attacked in the Persian Gulf; President Trump threatening sanctions on a fellow NATO member, Germany; the riskiest US debt hitting a record high; and a rally in both US Treasuries and the broader US equity market.
If you consider that US trade talks with China are currently in a stalemate, that the US economy is beginning to hit air pockets as measured by select recent economic data, and that the likelihood of increased tariffs on Chinese imports into the United States is rising every day, there certainly are plenty of reasons to shy away from risk. The street apparently doesn’t see it that way.
Simply put: “First, those resilient stocks. In spite of the miserable headlines, the S&P 500 climbed 0.5% in the five days. The easiest conclusion is that equity investors are betting on supportive central bankers helping juice either economic growth or asset values, or both, and there’s plenty of evidence to support that. Something else to notice: the ratio between an index of safer, low-volatility U.S. shares and riskier value shares has been testing its all-time high for a week now. The equity rally has not been created equal. Amid the broad updraft, investors have also been girding themselves for a slowdown.”
At the outset of May, I called for the major US equity market indices to test their respective 200 DMAs. They did. There was some technical damage as a result of that trade but the sharp rebound higher that ensued provided a degree of justification and relief for investors. Last week in several media interviews, I reiterated the need for markets to confirm resiliency at the 200 DMA. I still expect there to be pricing weakness in coming weeks, as we head into Q2 earnings season.
This rally is largely predicated on what the Fed can provide in terms of downside protection for investors.
This week, the Fed holds its FOMC meeting, followed by the announcement and forecasts, and a press conference. The Fed is not moving on rates this week. Chair Powell may offer a “bone” of sorts for markets in term of verbiage in the announcement and press conference, but any actual move on rates is not in the cards at the moment. Given the perceived need for such, as predicated on our recent run-up in equity prices, anything other than one would leave investors mildly frustrated. It is in the forward-looking guidance and forecasts, then, that investors will attempt to find refuge and a degree of solace. God forbid the US economy proves to be more resilient than expected in the face of significant global and domestic headwinds. Last week’s economic data provided justification for just that: a more resilient economy than many had been expecting.
Last week’s economic data releases provided a context for modest, but continuing, economic expansion. The PPI-FD for May was largely in-line with Econoday consensus. Topline M/M change was 0.1%, Y/Y 1.8%. Less food, energy, and trade services it was 2.3%—none of which is recessionary. CPI for May was also in-line. M/M 0.1%, Y/Y 1.8%, Y/Y less food and energy was 2.0%. The EIA Petroleum Status Report for the week ending 6/7 reflected a tame supply/demand landscape. Weekly Jobless Claims ticked marginally higher to 222K, from a revised 219K—effectively a non-event. Retail sales were solid. For the month of May, the M/M change was 0.5%. Industrial Production for May was a solid 0.4%—above Econoday consensus calling for 0.2%.
This week’s economic calendar will obviously be dominated by the FOMC and Chair Powell. Otherwise, on Thursday we receive the Weekly Jobless Claims data for the week ending 6/15, and the Philly Fed Business Outlook Survey. On Friday, Existing Home Sales for May are released.