In the thick of it. Equity markets took a pause in the latter half of last week as indices posted a mixed close on Friday. Traders weathered a raft of corporate earnings, political upheaval, unheard of levels of jawboning, and executive tweets posting some important closes in the first half of the week. From a technical perspective: The S&P500 Index starts the week above a critical 2800 which will serve as its support and its next level of resistance being its January highs of 2872 (see chart 4). The VIX index has settled into its comfort level, which is only notable considering the level of risk and uncertainty that is currently being weighed by investors. The implication of this indifference is the potential for weakness in equity markets if a bit of unwanted news hits the tape this week. The Dow Jones Industrial Average closed just above its critical 25000 level for the week (see chart 6). It will continue to use the 25k level for support with resistance set above at 25498. The Russell 2000 Index attempted a comeback after pulling back in the wake of posting all time highs in the week prior. The small cap index, which closed just below its round 1700, will get some support at 1672 with resistance at its all-time-high 1708 (see chart 7). The NASDAQ 100 Index hovers just below its all time high and very little in the way of support and a gap near 7100 (see chart 8). In many cases traders will attempt to fill gaps, which can cause some weakness in the index in the weeks to come. The S&P, Russell 2K, NASDAQ are all constructive while the Dow remains in neutral. In fixed income, the aggressive flattening of the yield curve was given a bit of relief on Friday as the 2 year / 10 year swap steepened by 5 basis points to 29 basis points in the wake of the President’s Fed-critical remarks in a CNBC-Kernan interview and some Japanese jawboning. The steepening was effectively caused by sell-off in 10 year treasuries causing 10 year yields to rise to the high end of its recent range (see chart 20)
With equity indices and treasury yields poised for a break on the upside, this will be a make-or-break week. It is important to note that the recent positive moves have been led by the resilient tech sector with a little help from the underdog and undervalued financial sector. With all of the key indices being capital weighted, the larger cap technology companies have the ability to carry the entire index. To give you an idea of just how dominant the tech sector is on the S&P500, I have attached a pie chart of S&P weights by company (please check it out, it is really shocking). Nearly half the pie is made up of Apple, Amazon, Google, Microsoft, and Facebook. This week’s earnings release calendar (see attached earnings release calendar) features 3 of the 5 big slices of the pie starting with Alphabet/Google today (we get heavyweight Apple next Monday). Earnings have so far been better than expected with 71 out of 75 S&P500 reporting companies beating estimates last week. In addition to big techs, this week’s earnings also includes autos, defense, lots of energy, and some retail, so if earnings continue to be top-of-mind for the markets, we can expect a broad array of sectors to be pining for leadership. The economic calendar this week starts out slow and ends with a bang in durable goods orders and the GDP (see attached economic calendar). Included in the GDP release is the all-important PCE component , which is the Federal Reserve’s favorite inflation indicator. Analysts will hold their breaths and look for any trade impacts on GDP as well as hints of inflation in PCE number. Traders will look for earnings to help support equities and continue recent positive momentum. The week ahead also includes ongoing NAFTA negotiations and continued trade anxiety which always has the ability to take the wheel and drive the markets. There will be little time for rest in the thick of this jungle-of-a-week. Please call me if you have any questions.
IMPORTANT DISCLOSURES.
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