E As Geopolitical Tension Rise, Q1 2019 Earnings Estimates Fall: S&P 500 Approaches 200-DMA

It was a headline-heavy week that drove the S&P 500 (SPX ) absolutely... nowhere. In fact, after a strong start to the trading week, and a subsequent pullback in the middle of the week, by week’s end the S&P 500 was up a scant .005% for the week. We can look toward the abundance of headlines on trade and slowing global economic activity as the culprit for the market’s pause this week, but more than likely this will prove a more technical pause than fundamental pause. 

Given the strength of the rally off of the Christmas Eve 2018 lows, the S&P 500 and most every index ETF recently found itself in overbought territory. With the market pausing its advance last week, many of the index ETFs are back to neutral territory while the rest remain overbought.

As shown in the table above from Bespoke Investment Group, the Dow Jones Industrial Average (DJIA) and S&P 500 Spiders ETF (SPY) are back in neutral territory when compared to their overbought status from a week ago. While in neutral territory they are basically teetering between the two conditional states of being overbought or neutral.

I have discussed, in many recent narratives, the technical levels that serve as support and/or resistance for the S&P 500. During this uptrend, the benchmark index has moved above and beyond its 50-DMA. Beyond that level is the next big hurdle, which continues to be the 200-DMA, residing at roughly 2,742.

In the week that was, the S&P 500 attempted to rally up to this technical level and narrowly missed achieving it before falling back down to the 100-DMA. The failure to get the S&P 500 above the 200-DMA on the first attempt is not the end of the world, but it doesn’t help short-term sentiment, given the backdrop of somewhat negative global economic growth headlines.

At present, the S&P 500 is right around its 100-DMA, another key level of what is now support. From a technical perspective, what I’ve discussed in recent weeks is that a potential for a market pullback is highly probable until we hold above the 100-DMA and break solidly through the 200-DMA. Until BOTH technical milestones are achieved, the risk of a pullback is still at heightened levels.

So what is driving the market? My acronym for markets in 2019 is plainly and simply Earnings-FOMC-Global Trade or EFG . These 3 factors will likely feed into each other and be portrayed with either strength or weakness in the S&P 500 throughout the year. Obviously, in order for the market to trend higher, the market demands resolution on global trade (China/U.S./EU), a maintaining of a dovish Fed and earnings growth to tic higher throughout the calendar year. Without these 3 components coming to fruition, it is unlikely that the current S&P 500 will be sustained. With that said and with the S&P having paused in the week that was, let’s take a look at what’s on-tap for the coming week.

S&P 500 Pause That Refreshes?

Two weeks ago, the S&P 500 weekly expected move was $47/points. Last week that weekly expected move fell to $40/points and this week, well it really hasn’t budged that much.

As shown in the table above from TD-Ameritrade’s Think or Swim platform, the weekly expected move for the coming week is roughly $41/points. It should be noted that in each of the prior 2 weeks, the S&P 500 managed to stay within the weekly expected move. As the market has climbed higher, market efficiency has also been found to increase, with volatility on the decline. The VIX dropped under 16 this past week, before popping higher on the sell-off that started Wednesday.

Friday proved to be a very volatile market day with the S&P 500 falling greater than 1% intraday and before rallying into the close and to finish ever so slightly higher on the trading day. What I believe we witnessed on Friday was the so-called FOMO rally (Fear Of Missing Out). Essentially, the market had fallen on Wednesday and Thursday for two main reasons, headlines outside of the United States centered on declining economic growth from within the European Union and trade headlines suggesting the U.S. and China may not reach a deal by March 2, 2019. Regardless of these two concerns, the market sentiment didn’t seem to point toward greater declines and with technical levels still proving supportive, investors bought the dip just in case something positive surfaces in the near future as it relates to trade. Subsequently, FOMO ensued and the VIX eased lower, back below 16.

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