Not unexpectedly, the S&P 500 ran into resistance at its 200 DMA last week. However, that resistance yielded only a fractional trade lower. So brief and nascent was the trade lower as a result of that resistance that on Friday buyers emerged in the closing hour to assure a positive performance on the day and week for the S&P 500. The emergence of buyers into the closing bell, particularly as a result of an intraday reversal, on a Friday, is generally positive for the market.
Given the backdrop of Q4’s equity market meltdown and subsequent reversal that has led to seven consecutive weeks of gains, several factors will likely be needed to push higher from here. Those factors include a political deal in Washington DC that eliminates the risk of a second federal government shutdown in three weeks, continued strength in both guidance and Q4 results, additional data-centric support for our ongoing economic expansion, and a potential breakthrough in the trade and tariff talks being held between the US and China in coming weeks. Though not an impossibility, that is a lot to ask for.
Though all three major US equity markets have continued to rebound in seemingly lockstep fashion since December 24, the Dow Industrials have provided the leadership.
As we have recently discussed, the Dow Industrials did not suffer as steep a selloff as the Nasdaq or the S&P 500 in Q4 due to the dividend-rich complexion of the index, and due also to its lack of high beta “growth” stocks. In part, as a result, the Dow is the only major equity market index to close above its 200 DMA on Friday. If, as I expect to be the case, the Dow Industrials continue to provide leadership for the broader market, both the Nasdaq and S&P 500 should trade above their 200 DMAs as well in coming weeks.
According to http://www.multpl.com/, the Price/earnings ratio of the S&P 500 is 20.76 as of Friday’s close. The historical P/E mean for the S&P 500 is 15.73. The median is 14.73. Though modestly elevated by historical standards, the current valuation is well below where it stood at the end of Q2 2018 and certainly does not set off any alarms. In fact, in an economy that sports a GDP of +3%, the current S&P 500 P/E valuation speaks to solid corporate earnings growth and non-inflationary economic expansion.
Last week’s economic calendar was constructive for investors. Factory Orders for November were -0.6% versus October’s -2.1%. PMI Services Index for January, 54.2, matched Econoday consensus and was 0.2 below December’s 54.4. On Wednesday, the one significant takeaway from Chairman Powell’s talk was that the US labor market is “very healthy.” Also on Wednesday, the EIA Petroleum Status report for the week ending 2/1 was released. Again, the US crude oil market appears to have achieved a degree of elusive equilibrium. Crude inventories rose 1.3 M bbl. Gasoline inventories rose 0.5 M bbl and distillate inventories dropped by 2.3 M bbl. WTI crude closed at $52.77/bbl. On Friday – down 4.5% on the week despite relative tight balance between production and consumption. In large part, that near-term weakness is a result of the concern focused on the US/China trade talks. Crude oil pricing weakness is pricing in a possible failure in those talks and a subsequent slowdown in global trade and growth. Weekly jobless claims were slightly higher than Econoday consensus 234k vs. 223k as a lingering result of the federal government shutdown.
This week’s calendar will provide some additional insight into how the economy is fairing thus far in 2019. The NFIB Small Business Optimism Index is due out on Tuesday at 6:00 am. CPI for January is due out on Wednesday. Econoday consensus is 0.1% on a M/M basis, 1.5% Y/Y. PPI-FD on Thursday and Industrial Production for January and Consumer Sentiment for February (preliminarily) round out the week on Thursday and Friday, respectively.
The leg-up investors have been treated to for nearly two months has seen sponsorship rotate from financials, to large-cap tech, to big data. This week the retail sector will undoubtedly generate a great deal of investor attention. Last Friday, Columbia Sportswear broke out. Nike, Deckers Outdoors, and Lululemon all appear to be positioned for a move higher as well. The sector is being propelled by indications that the sector will continue to post better-than-expected quarterly results, healthy consumer spending, and near-cycle high levels of consumer confidence.
Another sector of the market due to dominate the earnings calendar this week is energy. In particular, Marathon Petroleum, Laredo Petroleum, and Pioneer Natural Resources are due to report. Coca-Cola (KO) is due to report on Thursday before the market opens.
In the event a second partial federal government materializes at the conclusion of this week, look for traders to lighten up on positions.
Flickr photo: cmpalmer
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