S&P futures are down hard once again on Sunday evening. This is getting to be ridiculous. It is almost to the point where we should short the S&P futures every Friday at the close and then buy back at the open Monday morning. Obviously, once we started to play it that way the trend would change.

The Asian markets are all crashing and that has pushed the S&P futures lower. The current -8 reading is not nearly as bad as it could be given the declines in Asia. China's President Xi gave a speech pitching China as the gobalization champion of free trade. Yes, China. The country kicked off a week long Import Expo with Xi as the keynote speaker. Given the ongoing trade fight between the US and China that will be a cloud over the Expo.

President Trump is trying to get free trade with China but they are not interested. We charged a 4% tariff on cars from China but they charge 25% on ours cars into China. Companies wanting to start a business in China must have a Chinese partner with 51% ownership. Numerous products are outright restricted or banned. This was before the latest round of tariffs and retaliation tariffs.

In the speech by Xi, he promoted the benefits of an open international economy and said China is pursuing a new round of high-standard "opening up" to broaden market access to the rest of the world. If he were actually being truthful about China's goals for free trade, it would be a global game changer. Their economy would explode with opportunity but they are still a communist country and the government is in charge.

The tariff battles are having an impact. The Calxin/Markit PMI Services Index for October fell from 53.1 to 50.8 and the lowest level since September 2017 because new orders have evaporated. The service sector accounts for more than half of China's economy. The index is very close to falling below 50 which represents contraction rather than growth. The new orders component declined from 52.4 to 50.1 and virtually no growth. The composite manufacturing and services PMI declined from 52.1 to 50.5 and the lowest since June 2016. China's reported GDP at 6.5% for Q3 was the slowest since the financial crisis. However, nobody really believes the official number and some analysts believe it is closer to 2%.

The US markets could be volatile this week because of the elections and the FOMC meeting.

The S&P hit the 10% correction level on Monday's afternoon drop to 2,603 only to be instantly bought and rally 153 points over the next four days to touch 2,756 on Friday morning. This was a nearly textbook V bottom reversal and monster short squeeze.

Now that the short squeeze is over, we will see if the real buyers return in volume on Monday. Friday's volume of 8.8 billion shares was the lowest volume since October 22nd. The A/D volume was almost even but declining stocks beat advancers slightly at 3,922 to 3,514. Weekend event risk and the impact from Apple kept the big cap indexes from returning to positive territory.

The S&P successfully rebounded over the 2,700 level and managed to stay above that level on Friday but only by 0.44 of a point. There will be significant resistance at the 200-day at 2,764. We are not out of the woods yet despite the perfect trend over the last 72 years.

In 18 of the last 18 midterm years, the markets roared higher in the two months after the election with an average gain of more than 10%. Obviously, every year is different but over the last 72 years, that trend has overcome a lot of different market conditions. Let's hope it continues unbroken.

The consensus is that tipping the house into democrat hands by a small margin will produce gridlock and nothing will change over the next two years. The market should move higher. The small margin is critical. If there is a large margin, there will a greater chance of an impeachment move against Trump and Kavanaugh and that will poison sentiment and the market may not move lower but any move higher will be blunted.

The consensus is that republicans retaining control of both the house and senate would result in another rally because it would cement the regulatory changes and usher in another tax cut for the middle class along with additional cuts to regulations and pro business initiatives. It would also prevent any impeachment activities and months of negative headlines.

Depending on the outcome of the election, it is entirely possible to see 3,000 on the S&P by the end of 2018 but I would not bet on it. The correction has caused significant uncertainty and damaged portfolios. This triggers the "if my stock just gets back to $NNN, I am cashing out" syndrome. Investors were caught off guard, did not have stop losses and now they are underwater. If they can get back to where they were or just close to even, they will flee to the sidelines to lick their wounds. That means any move over 2,800 is going to face stronger resistance with every tick higher. Moving over 2,900 is going to be nearly impossible.

The Dow was handicapped by Apple and Boeing but did recover from a drop to -302 intraday. The breakdown in the China trade deal story was the culprit that knocked the Dow 500 points below its intraday high. Chevron and Exxon helped keep the damage to a minimum.

The Dow is back over the critical 25,000 level and now fighting resistance at the 100-day and the 25,500 level. The moving average is the least of the Dow's problems since the index is not normally reactive to moving averages. If you look back over the last year, any reaction was probably coincidental.

The next resistance will be around the 25,800 level and the high for mid October.

The Nasdaq struggled because of Apple, which knocked 62 points off the Nasdaq 100 index. Thursday's close at 7,435 is now the resistance to watch. Apple shares are likely to be volatile for a while as investors try to decide what the future holds for the stock. We will probably see more selling since it is a very widely held stock but some analysts are calling this a buying opportunity. Since they already had buys on Apple, they may be just protecting their rating by trying to pump shares back up again. The expected volatility in Apple will translate into volatility for the Nasdaq and Dow but the big move is over. Future moves will probably remain in low single digits.

I am grateful that the tech sector did not decline even more on the Apple news. Since all but three of the Nasdaq big cap tech stocks are still in correction territory, investors were probably more focused on buying the dip instead of selling more stock.

The Russell 2000 overcame the downdraft in the tech sector and posted a minor gain. This was actually bullish since the index had been up sharply the prior two days and the urge to take profits was minimal. A strong Russell should lead to a continued market gain.

The calendar for next week is light with the ISM Nonmanufacturing the only material report until Thursday's FOMC announcement. The JOLTS on Tuesday covers September and will produce a headline but it does not move the market.

The Fed is not expected to raise interest rates but their statement could have some clues as to their thoughts on the market correction and the blowout jobs numbers. That will be the most important economic event for the week.

This is a very busy week for earnings with nearly 500 companies reporting. The most watched names will be Booking Holdings, formerly Priceline, Match.com, Monster Beverage, Qualcomm, AstraZeneca and Disney. There are 74 S&P-500 companies reporting this week.

So far this quarter blended earnings are expected to rise 27.1% with more than an 8% revenue rise. On average companies are beating earnings estimates by 6.5%. Of the 376 S&P companies already reported 77.9% have beaten earnings estimates and 60.6% have beaten revenue estimates. There have been 37 guidance warnings for Q4 and 20 guidance upgrades. The current forward PE for the S&P is 15.8.

This week the Fed meeting announcement is on Thursday instead of Wednesday. Normally there is an uptick in the market the day before the announcement. I do not know how that is going to play out since the Fed meets after the election. The election will have far more market impact and the Fed statement could simply be ignored unless there is a significant change in outlook.

Halloween was the end of the fiscal year for mutual funds. Any portfolio adjustments they wanted to make as in tax loss selling, would have to have been completed before Oct-31st. This suggests that they are now free to add to or create new positions for the 2019 fiscal year.

This is also a high activity buyback period. Companies that have reported earnings are now free to act on their buybacks. With stock prices in correction territory, this would be an ideal time for companies to get the most bang for their bucks.

The bottom line is that the market should have a positive bias unless the election goes badly but expect volatility to remain.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email