Back to square one. Last week was not necessarily one for the record books but it was certainly one fraught with lots of extreme movement for very little return. The major equity indices all ended the week roughly unchanged as the Dow Jones managed a small gain on Friday while the other indices traded off. The week was filled with economic releases, Fed speeches, corporate earnings, and Fed minutes. The end result from last week’s deluge of information was: companies are beginning to talk about potential impacts of a trade war, the trade war is still on, housing continues to slow and is being exacerbated by higher interest rates, and the Fed is going to continue to raise interest rates. Oh and don’t forget to throw in some geo-political tension with the largest foreign investor in US technology and biggest almost-buyer of US military hardware. That is quite a list of stimuli to digest! Considering all of that, and despite the significant amount of volatility, markets managed to digest the information avoiding the extremes from the week prior, relatively speaking. Let’s get a quick read from the charts in my attached daily chartbook.
The S&P500, though it traded down in Friday’s session, managed to close right on its 200 day moving average which is a small positive for the index that is still in rough waters (chart 4). The VIX index, which tracks S&P500 volatility and is used as a hedging mechanism, closed Friday’s session out around 20 which is still in the worry zone (chart 5). The Dow Jones Industrial Average closed up slightly on Friday having given up significant gains from earlier in the session. The Index continues to hold up above key support levels as it continues to build a base around its 25335 Fibonacci line (chart 6). The Russell 2000 could not manage to bring itself out of the rut that has characterized October. The Russell remains below its 200 day moving average, has negative momentum, and is struggling to hold its key support lines (chart 7). This index must regain its health before equity markets as a whole can restart their upward climb. The NASDAQ 100, though it was a very volatile week managed to stay above its 200 day moving average and key support levels (chart 8). All of the equity indices remains risk off. The Chinese Yuan continues to weaken and the Dollar/Yuan exchange rate is trading at the high end of its range making new highs (chart 14). This is the result of China’s slowing economy and their unwillingness to bolster the currency. Some view their lack of support as being manipulative – remember a weak currency is good for China and bad to the US. Treasury yields remain on the high end of their recent range with ten year yields rising on the week (chart 20). They will start today’s session around 3.19% and will continue to be a risk factor for stocks at these levels.
The big question is which of last week’s themes will follow us into the week ahead? More importantly, how will the market react to another similar week of releases? On the release front we have a slow start but will receive a number of more influential ones later in the week. Releases include more housing numbers, manufacturing PMI, durable goods orders, and finally GDP with all of its consumption and inflation components. We will also get some regional economic reports as well as the Federal Reserve’s beige book. The beige book is released by the Federal Reserve and details the economic health across all of its regions. The release’s text will be heavily analyzed for any signs of a slowing economy and can certainly be a market mover. This week will also feature a number of high profile earnings releases as we continue the journey through earnings season. As we saw last week, an earnings beat does not necessarily cause a stock to trade up. Traders are becoming more skeptical about future guidance as they attempt to gauge the affects of tariffs and higher rates. Finally, China and Italy will remain a factor for the markets this week. Italy’s debt was downgraded due to economic uncertainty and it is too early to tell how the markets will react to the move. Additionally China posted its worst economic growth since 2009 last week and President Xi has taken out all the stops over the weekend offering the potential to cut income taxes in order to shore up the struggling economy. So, it is clear that we can expect last week’s themes to carry over into this one which will likely result in another volatile one.