Last week’s pullback leaves equity markets vulnerable

The pullback that I suggested was on the horizon in last Monday morning’s note took shape last week. All three US major market indices lost ground on every trading day of the week. That five-day trade lower was the first of 2019.

Last week’s equity market pullback felt more significant than it actually was on percentage basis. All three major equity market indices only lost between 2% and 3%. I would suggest that was modest – particularly given the run-up in prices we have had since 12/24.

In something of a counter-intuitive trade on Friday in fact, equity markets did not see much follow through on what could well have been a more significant trade lower as a result of the disappointing topline numbers in the February Employment Report. In fact, the Nasdaq Composite lost only fractional ground on Friday (-0.18%) as did the Dow Industrials (-0.09%) and S&P 500 (-0.21%). Equally as significant as the fractional loses on Friday across all three major equity market indices, was the fact that volume dried up. On Friday the Nasdaq Composite volume contracted by 4.73% while the NYSE Composite volume shrank by 12.26%. The lack of momentum on Friday’s trade lower in conjunction with contracting volume is an indication that institutional investors are not entirely certain that the path of least resistance is significantly lower for US equity prices – for the time being.

However, there are always reasons to remain vigilant. On Friday the S&P 500 closed just below its 200 DMA – 2750. Ideally, a close above 2750 would have provided for a more constructive near-term outlook for investors. However, the 50 DMA is upwardly sloping and given no significant disruptions to the equity trading landscape/narrative this week we could well see the 50 DMA trade up and closer to its’ 200 DMA. A break above the 200 DMA by the 50 DMA would provide technical support to the market.

As has been the case for all of 2019 thus far, the Dow has outperformed its peers. The Dow closed at 25,450 on Friday – above both its 50 and 200 DMAs. And as is the case with the S&P 500, the 50 DMA is trending higher. The Nasdaq Composite has remained the relative underperformer of the three. It closed below its 200 DMA on Thursday and Friday. And closed out the week -9% from its 52-week high. While the Dow Industrials closed on Friday -6% from its 52-week high and the S&P 500 was 7% lower.

It is too early to know whether we will see markets breach lower this week. Much will depend on US/China trade talks. Away from that theme, there are some worrisome signs beginning to manifest in the global economic landscape.

Last week the ECB lowered growth forecasts for the euro-zone and took a decidedly dovish tone in regards the need for additional stimulus and monetary accommodation. Closer to home, the release of the February Employment report on Friday left investors underwhelmed. Econoday consensus was calling for a monthly employment gain of 175k. The actual total was 20k. January’s preliminary gain was adjusted higher to 311k from the initial reading of 304k. Though the top line results did disappoint, there were some data points in the report that allowed for a more constructive takeaway. The unemployment rate dropped from 4% in January to 3.8%. Manufacturing payrolls for January were adjusted up to 21k from 13k. the LFPR remained 63.2% and most importantly, wages rose. Average hourly earnings rose to 0.4% in February from January’s meager 0.1%. On a year-over-year basis, average hourly wages stand at 3.4% – well above the rate of inflation.

Continued concern over the global expansion, with a renewed focus on the euro-zone and China, will continue to haunt the market and undermine investors enthusiasm. Domestically, concern over an earnings recession in coming quarters is increasingly difficult to ignore. For example, Morgan Stanley’s Mike Wilson lowered his 2019 S&P 500 EPS target to 1% from 4.3% last month. S&P has predicted a decline in S&P 500 earnings in Q1.

With concerns continuing to gather on the horizon, discretion will increasingly be rewarded. Risk will likely be shunned – particularly as we close out Q1. The rollover that took shape last week is likely to see some follow through this week though it will likely be uneven. If the US and China are unable to reach a trade deal in the coming days or weeks look for markets to languish. If no deal is reached at all look for markets to take a leg lower.

This week’s economic calendar highlights:

Monday: Retail Sales for January. Seasonally a weak month with Econoday consensus calling for a flat (0.0%) monthly reading versus January’s -1.2%

Tuesday: The Bureau of Labor Statistics releases the Consumer Price Index reading for February. Econoday consensus is 0.2%. Less food & energy, M/M 0.2%.

Wednesday: Durable goods Orders for January are released. Econoday consensus is -0.8% versus December’s 1.2% gain. The Producer Price Index for February will be released by the Bureau of Labor Statistic. Econoday consensus M/M is 0.2% versus January’s -0.1%. The EIA Petroleum Status Report is due out at 10:30 am. Last week crude inventories rose 7.1M bbl, gasoline (-4.2M bbl) and distillate inventories (-2.4M bbl) saw draws.

Thursday: Weekly Jobless Claims should reflect a post partial government shutdown low. Econoday consensus is 225K – inline with the previous week’s reading. New home sales SAAR for January are expected to match December’s 620k.

Friday: Industrial Production for February is expected to reflect a rebound from January’s disappointing results. Econoday M/M consensus is 0.4%, manufacturing M/M 0.4%, capacity utilization rate – level 78.5%.

Earnings highlights on tap this week:


Momo (MOMO)

Adobe (ADBE)

Coupe Software (COUP)

Ulta Beauty (ULTA)

Broadcom (AVGO)

Flickr photo: gluemoon
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