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Market Not Able To Breakout On Fantastic News - Be Careful

Posted by Pete Stolcers on February 4

Posted 9:30 AM ET – Last week traders digested an incredible amount of news and it was generally good. The S&P 500 challenged the 100-day moving average on Friday, but it could not break through. This is a formidable resistance level and buyers need clarity on unresolved issues before they add risk.

Earnings season is in full bloom and almost half of the S&P 500 companies have reported. On average, earnings per share have grown 18% on a year-over-year basis (better than expected). Over 70% of companies have exceeded earnings estimates and that is also above average (64% of companies typically beat). The guidance for Q1 has been cautious. After the close we will hear from Google, the last of the mega cap tech giants to report. Good news is priced in.

The FOMC was dovish last week and they will decelerate their balance sheet reduction. We don’t know the magnitude, only that it will be less than $50 billion per month. The Fed cited domestic strength, international weakness and political uncertainty. They will adjust their tightening accordingly, but they still project two rate hikes this year. The market is not pricing any rate hikes in. I believe this is overly optimistic and any surprise from the Fed will weigh on the market.

Domestic economic growth is strong. ADP, the Unemployment Report and ISM manufacturing were robust last week. Hourly wages only increased .1% – inflation is not a concern. The jobs report (304K new jobs) was as good as it gets.

International growth is vulnerable. China’s manufacturing sector is contracting, Germany’s retail sales were down 4.4% (Y/Y) in December and Italy is officially in a recession. Japan’s numbers have also been soft. Brexit is weighing on England’s economy. There are many data points that suggest a global slowdown and the IMF has reduced growth forecasts for 2019.

Theresa May will try to negotiate new terms with the EU this week. She has a self-imposed deadline of February 13th and she hopes to have a new agreement in front of parliament soon. The Irish border is the remaining “sticky point”. The deadline for a deal is March 29th and the parliament voted not to extend that date. This will all play out in the next two months.

China’s trade negotiations with the US seem to be moving forward. A new meeting is scheduled in less than two weeks and they announced it right away (good sign). This process will take a long time, but both sides seem eager to find middle ground.

President Trump will address the nation Tuesday night in the State of the Union Address. A great deal of time will be spent on border security. He will send a clear message to voters that the government will shut down without funding for the wall.

Swing traders should remain in cash. I believe that the market is discounting all of the bad news and that we are due for a pullback. The market got every shred of good news last week and it was not able to move through the 100-day MA on a gangbuster jobs report. It will try to breakout again this week and we could be seeing the first signs of exhaustion. In particular I would like to see a surge higher and an immediate reversal. That pattern might be an inverted hammer or a bearish engulfing pattern off of the high. The longer we wait – the cheaper the puts get.

Day traders should prepare for choppy trading. Buyers and sellers are paired off and the range will be determined in the first hour. Many Asian markets are closed so I’m expecting a relatively quiet day. Fade the extremes if the SPY is inside of the first hour range.

This is another heavy week of earnings and the reactions will tell me if there is more “gas in the tank”.
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