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An Obligatory Market Commentary

Written by Michael Kahn | May 3, 2019

The most interesting thing about the stock market this year to date has been the failure of the experts to encourage their clients to jump back in. I suppose the bears will finally have an argument right here as the Standard & Poor’s 500 and Nasdaq Composite ran smack into resistance at their respective old highs. Whether this is the end of the road remains to be seen, although there is precious little evidence to suggest a serious decline is at hand.

Perhaps we could have cut those experts some slack in December when the S&P 500 took out support (at roughly 2600). It sure looked like a sharp breakdown and considering that the entire year of 2018 was more or less a trading range many agreed.

Then came the turnaround. Before the year was out, the market came charging back. OK, perhaps it was the proverbial dead cat bounce. But when we saw all sorts of signs, from the climactic volume at the lows to breadth thrusts, we had to know something was different.

Maybe the economy was not as soft as the pundits said. Maybe the financial news was spinning a more exciting story based on politics rather than the actual market’s message. Then the Federal Reserve saw the error of its ways and halted its ill-fated attempt to bring short-term interest rates back up a bit.

I’m still not worried about the so-called yield curve inversion. Other than the bogus analysis we’ve seen called the bill-to-note spread – the 3-month Treasury bill vs. the 10-year Treasury note – inverting, the rest of the curve looks rather normal. Yes, it’s fairly flat, but it is not inverted.

The more widely followed 2-10 spread – the 2-year note vs. the 10-year note – never inverted and, believe it or not, recently scored a technical breakout to the upside. In other words, the spread is wider now than it has been in since before the stock market tanked last December. That’s not bad.

Right now, the stock market rally faces its first real test from the technical side. As mentioned, the big indexes hit resistance. And the small-cap Russell 2000, while still officially holding on it a breakout, has really stalled in a big way at its own resistance level.

Call this the cause to pause. Investors might want to keep some powder dry here by waiting for these indexes to actually punch through their resistances. But selling out? That is also more wait-and-see because right now everything seems to be holding.

Weak markets hit resistance levels and fall away fairly quickly. Why? Because there are no minions of buy the dip people waiting to scoop up every pullback. That’s not what we see today.

From a different angle, the first quarter GDP, despite being partially due to inventory buildups, was still a good sign for stocks. There is an old saw that says, “surprises happen in the direction of the trend.” With GDP beating consensus at 3.2%, I think old saws should be heeded.

Let’s shift to outside factors.

The benchmark 10-year Treasury yield still remains in a downward march. That’s probably not a good thing for stocks this deep into expansion as it shows either a lack of conviction to invest (meaning lower demand to borrow money for projects and acquisitions) or behind-the-scenes fear driving a “flight to safety” or “risk off” trade with Treasuries.

The U.S. dollar is also holding on a trend, albeit a rising one. As every pundit like to talk about, a strong dollar hurts exports, suggesting big multi-national companies will feel some pressure. I counter by saying the smaller, domestically focused companies of the Russell 2000 should be outperforming their bigger cousins if the dollar were at such a point.  But they are not. The Russell has been lagging the S&P 500 since February.

Well, at least gold looks weak in the face of the rising dollar. But that’s a nothing burger.

How about earnings? So far, so OK. For every Microsoft, there is a Google (I mean Alphabet). For every Boeing, there is a Merck. In other words, this is an argument to continue to keep an eye on the charts rather than trying to divine market direction based on how your favorite companies are doing on the profit front.

We’ve still got the same old geopolitical and economic items in play. Brexit is delayed. China trade is, well, uncertain. The market seems almost numb in reaction. Therefore, the outlook right now is really a short-term hold, as we wait to see if the indexes can push through resistance. Signs suggest they will, but we must give the market the final say.

The subtle item to keep on the back-burner is the recent Business Week cover asking “Is Inflation Dead?” These mainstream magazine covers tend to happen just when the story they are covering is so well-known that “everybody” knows it. That is the sentiment extreme that can point to a major change coming within a few weeks.


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Michael Kahn, CMT has been working with charts and technical analysis since 1986 and just finished a long run at Barron's. He is the author of three books on technical analysis published in five languages. His specialty: jargon free analysis accessible to everyone.

2019/05/03
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