Last week’s equity market performances were mixed with the three major US market indices barely registering a move. The Nasdaq lost 0.65% while the Dow Industrials (+0.59%) and S&P 500 (+0.52%) managed fractionally positive weekly performances. The stall in equity market price appreciation we saw materialize last week speaks to investor caution ahead of this week’s FOMC Meeting/Announcement, Bank of Japan Meeting and the richest valuations of the year to date for US equities.
Investor caution has been reflected in recent sessions by a slip in volume and by our range bound trade. However, last week several significant and potentially positive technical developments did materialize for investors. The Dow Industrials and nearly 30 S&P 500 component companies formed a golden cross which should lead to some continuation in positive price action this week, though I suspect it may be modest and heavily influenced by the FOMC and earnings.
The principle headwind for markets last week was earnings, particularly for the Nasdaq. Both Alphabet and Microsoft reported earnings below consensus and in the process weighed heavily on the technology sector and the broader Nasdaq index. Last week’s price action in both names and in the technology/software space, broadly speaking, speaks to cash outflows and a decidedly less optimistic outlook from investors for the near term. This week we will hear from Apple and social media icons Facebook, Twitter and LinkedIn.
Just as financials provided a positive context for the equity markets and some subsequent lift in the first week of earnings season technology shares weighed on the market last week. This week we will be hearing from the defense sector. Lockheed Martin, Northrup Grumman, General Dynamics and Raytheon all report as does Boeing.
Markets appear stretched while data continues to reflect a tepid economic environment. The backdrop continues to confirm for me that a bout of weakness is in the offing.
Considering that US equity markets have barley moved on a year-over-year basis, that earnings season thus far has been mixed at best despite lowered guidance and that the S&P is trading at a P/E of over 17, I am struggling to see where the stimulus will come from for a meaningful breakout and charge higher from here. Even an accommodative message from the FOMC on Wednesday at 2:00, which I do expect, will likely bare little fruit for investors.