The market's strong bounce last week was definitely not expected.
The prior 2.5 weeks had seen declines and in the case of the Dow there were new 4-week lows. The Dow and S&P were locked in a bearish descending triangle and threatening a major breakdown. Fortunately, Mr Sunshine blessed the markets with his outlook and a reversal was born. Warren Buffett said he had been buying stocks for the entire quarter because of good fundamentals and he had bought 75 million shares of Apple. That turned Apple around to gain $30 in a seven-day period. The Apple earnings helped because that reversed the decline in the chip sector. The Dow rebounded more than 1,300 points. Suddenly analysts were talking about new highs again.
The Dow rebounded twice off the 200-day and triggered a major short squeeze. The combination of Buffett and the 200-day rebound ignited a new rally. The Dow has now posted gains for seven consecutive days. The Nasdaq broke a similar streak with a 2 point loss on Friday. The Russell is only 4 points below a new closing high. It was a good week and it was unexpected.
The S&P broke out of its bearish triangle and closed over resistance at 2,675, 2,700 and 2,706. The next hurdle is 2,750 followed by the round number at 2,800.
Just because the easily seen descending trendline has been broken does not mean the danger is over. So far, the current rally is just another lower high from the March peak. While it is currently a bullish move, there is no guarantee it will continue to new highs.
The Dow stalled at the 100-day average at 24,850. Given its 1,300-point rebound from the lows of the prior Thursday, it deserves a rest. If the index can break through that level and 25,000, we could see a surge in short covering that could propel it past the congestive resistance at 25,250-25,400. The stocks that were sold the worse in the tariff dip were the stocks that are rebounding the most. Do not forget the 210-point gain from Apple as well. With three Dow components reporting next week there could be some additional volatility.
The Nasdaq has rebounded 441 points or 5.9% in the last 7 days. That would be a great move over a month or even a quarter. That much in 7 days suggests the need for some profit taking but the Nasdaq sometimes surprises investors with sprints that never seem to stop. Almost the entire month of January was vertical but that was followed by an even larger vertical drop in February.
The index has reached major resistance at 7,421. The minor decline on Friday could have set the stage for a breakout next week. If there were any sellers, they should have appeared on Friday. If the Nasdaq and Russell were to breakout next week we could see some serious short covering since both indexes stopped exactly at strong resistance.
The Russell has major resistance at 1,609 and it traded over that level by only 0.35 on Friday and 0.44 on Thursday. That is as close to a dead stop as you can get. The Russell should have benefitted from the 80-point biotech rally on Friday but was only able to gain 3 points. This is some tough resistance.
The calendar for next week is busy but there are only a few important reports. The retail sales for April will be important because it will show if consumers are spending their new tax cut dollars. The residential construction will show if builders are cutting back on supply as home prices and mortgage rates rise. The Philly Fed manufacturing survey is the most important of the monthly regional surveys and activity is expected to decline.
We are going to be faced with some declining numbers when the May reports come out next month because of the weeklong work stoppage at Ford. That was a major hit to Ford's productivity and their suppliers, which also had to slow production to keep parts inventories from backing up in the pipeline.
The Japanese Q1 GDP late Tuesday could be a challenge because some analysts expect it to be a negative number and that would have an impact on central bank stimulus and call into question the global economic recovery. Japan has not posted negative growth since Q4-2015. I do not want to get too far into the weeds on this but it could have global economic implications.
The earnings calendar is shrinking. On the S&P, 455 companies have reported earnings. Only 11 report this week including the last three Dow components before Nike reports in late June. Of those that have reported 78.2% have beaten on earnings and the expected Q1 earnings growth rate is now 26.0%. Revenue has risen 8.2% and 75.8% of companies have beaten estimates. The current forward PE is 16.7% and very reasonable. There have been 44 guidance warnings for Q2 and 35 guidance upgrades.
Dow components HD, CSCO and WMT will report this week. Worthy of an honorable mention are Agilent, Jack in the Box, Macy's, Applied Materials, JC Penny's, NetEase, Take-Two, Nordstrom and AstraZenaca.
We have the potential for another big week if the Russell and Nasdaq can break through their critical resistance levels. The other indexes should follow if that occurs. I have not really seen any indications of weakness under the surface. Friday had some sector weakness early in energy and biotechs but they recovered. The cloud over biotechs should have lifted although there was a speech later in the day that laid out some more details and that could cause some ripples on Monday.
My posture today is cautiously bullish. We should be in the post earnings depression period but there was no impact last week. We are in the sell in May and go away period as well and unless the market takes a dive over the next two weeks that strategy will fail again. I would pick some stocks with decent momentum and ride them until the trend changes, which it will eventually. The summer doldrums this year could be messy.
Enter passively and exit aggressively!
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