After a week of declines the futures are calm and flat on Sunday evening. It would be really nice to have a week where the market moved on fundamentals rather than headlines, or the lack thereof. Early last week the market declined as analysts pondered the fate of the Chinese trade talks and suggested President Xi was stalling until closer to the US elections. That, along with some negative economic data caused an end to the ten-weeks of gains.

The declines were minimal and averaged less than 3% but they were broad based with the A/D line 4:1 in favor of decliners on Wednesday and Thursday. Down volume on the S&P was the leader all week. Friday was the closest to even at 881 million up volume shares thanks to the afternoon rebound.

S&P-500 Stats (Fri on Top)

With the S&P futures flat to slightly positive Sunday evening we could see Friday's rebound continue through Monday morning. Whenever there is a late day rally on a Friday there is a good chance the short covering will continue at Monday's open, headlines permitting.

There is a difference of opinion on whether the Friday rebound was simply short covering ahead of the weekend or the end of a normal 3% dip on profit taking. The prevailing commentary on Friday was the "China wants all the I's dotted and T's crossed before committing to a meeting with Trump." I understand that and I think that would lead to a positive market if that narrative continues to be pushed. That is a positive development after months of hostility.

If Monday arrives and there are rumors of a breakdown in negotiations, then all bets are off.

Friday was a mixed bag for the Dow with no specific trend on which sectors/stocks were up or down. The index did rebound 200 points from the lows and that is always positive but is also closed at a lower low. The rebound could have set the stage for a continued move higher on Monday, but it will depend on the Asian headlines on Sunday evening.

The Dow failed almost exactly on 26,191 and has not yet reached round number support at 25,000.

The big cap tech stocks had a rough week. There was some volatility in the middle with a different set of stocks up and down every day. The FANG stocks rebounded on Friday and that helped keep the index from posting a major loss. The -13 loss on Friday was neutral after the 90 point drop at the open. With some tech heavy earnings on Thursday there could be some positive midweek sentiment.

The Russell also had a textbook failure at the 200-day average and the round number resistance at 1,600. The Russell was down -5% from the 1,590 high on the 25th and the Friday rebound was lackluster. The 1,500 level is the next support test on any further decline.

We have a busy week ahead with a variety of economic reports. The price indexes are important but there are not likely to be any signs of inflation. We are importing deflation with the lowered price of goods given the increased global competition. Analysts are expecting both price indexes to show a gain of +0.2% but I would be surprised if that happened.

Retail sales and new home sales will be important because of the subset of analysts that still believe we could be headed for a recession. The vast majority do not believe that but there are some lone voices crying in the wilderness.

The FOMC meets the following week but there is no chance of a rate hike. With other central banks adding stimulus there is a growing number of analysts who believe the Fed's next move will be a cut. The fed funds futures are showing an 8% chance of a cut at the June meeting and zero chance of a hike. The chance of a cut rises to 27% by the January 2020 meeting.

The earnings calendar next week is lumped together all in one day. On Thursday we have Adobe, Broadcom, Dollar General, Oracle and Ulta Beauty. The rest of the week is a motley collection of small caps, many with market caps under $100 million and volume of less than 100,000 shares per day.

With 493 S&P companies already reported the earnings growth for Q4 is 16.7% with 69.2% of companies beating estimates. Revenue growth is 5.1% with 60.2% of companies beating estimates. There are six S&P companies reporting this week. There have been 77 guidance warnings and 30 guidance upgrades. Earnings growth estimates for Q1 are now expected to decline -1.3%. This is still not critical, but it is far from positive.

I am neutral this week. I want to buy the dip as normal profit taking but the weakness in the Russell is causing me to question that strategy. The closing surge in the big caps could have been short covering or it could have been a cleverly executed buy program. We have seen many times over the years where some large fund triggers a buy program into a Friday close in hopes of forcing some short covering that carries over into Monday and creates a rally. I have no evidence that was the case on Friday, but it was suspicious. I would watch the 2,750 level and buy a breakout over that level with a tight stop loss. Intraday support on Friday was 2,725 so a breakdown there would be an exit signal.

I think the pendulum has swung from a "sell the news" event on a trade deal and back to a "buy the news" event when a scheduled meeting is announced.

Enter passively and exit aggressively!

Jim Brown

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