E The S&P 500's YTD Rally Is More A Function Of Liquidity Than Earnings Results And Sentiment

As mentioned above, the China trade offering came less than 24 hours after the U.S. trade offering headlined on Thursday. Both headlines were met with a favorable response from equity markets. It’s logical to assume the chronology of the headlines is fitting with purposeful leaks from both trade camps that are aimed at stabilizing economies around the world that are seemingly slowing. Additionally, with equity markets already boosted by ample liquidity injections since the New Year, the impetus to falsely leak trade information would seem unnecessary to boost markets unless accurate. In short, with global equity markets already rising in 2019 and China already upping their purchases of soybeans from the U.S., why offer such a long-term, six-year commitment on imports if the U.S. hadn’t also offered something substantial regarding China’s exports/tariffs? Logic dictates!

S&P 500 Performance, Precedence, Stats, Flows

For the week that was, the S&P 500 weekly expected move was roughly $45/points. It moved much more than that with the benchmark index finishing the week higher by $74/points, to 2,670. So what does this mean? In short, it means that we are back in the S&P 500 BOX (See Chart Below) that developed during Q4 2018.

The S&P 500 BOX is defined with an upper level of 2,800 and a lower level of 2,581. While the BOX has carried a negative bias/connotation as the SPX triple topped before breaking below support and cascading lower in December 2018, it now has a more favorable connotation as we’ve trended higher in 2019 and broken through resistance levels on the way up.

The S&P 500 is up 6.5% year-to-date. Statistically speaking, the S&P 500 has gone up more than 1.5% 4 weeks in a row. Along with many other signal posts like breadth and A/D line, the stretch of positive weekly moves of greater than 1.5% suggests the depths of the Q4 2018 market drawdown were largely without merit and/or overdone, expressing deep value in the market. Along with this assessment, let’s take a look at what happens to the S&P 6-12 months later and after moving higher by greater than 1.5% for 4 consecutive weeks. (Table from Troy Bombardia)

The statistics don’t lie and are overwhelmingly favorable. As depicted in the table above, from 1950 - present, this situation has been 100% bullish for the S&P 500 6-12 months later. Will 2019 find the trend remaining on par or will it prove a deviation from perfection? 

What I like about the current market action is that it is attempting to repair itself from a technical perspective. What don’t like about the current market action is that it is repairing during earnings season and with earnings coming in mixed, with respect to results being positive or negative. Ideally, I would like to see strength in earnings and revenues, but the results have been all over the place with beats and misses and on both top and bottom lines. Very few companies that have reported within the early reporting season (financials largely) have beaten on both top and bottom line. We are more commonly seeing a beat on bottom line, but a miss on the top line or visa versa. Given the dynamics thus far, I'm being forced to recognize the market is operating under the guise of greater liquidity and pricing in the fundamentals for the next 6 months.  As I shall discuss earnings a little later in this weekly research report, let’s take a look at what to expect in the coming week from the S&P 500.

So here’s the deal, right? I have talked about what I would like to see from the market and why.  Are the earnings bad, no! Is the economic data bad, no! But neither is improving to the degree we saw in 2018 and that dampens the mood of the market rally and calls into question how long it can last. Given the aforementioned, I am forced to conclude this is more a technical move, driven in part by an increase in liquidity and less about economic fundamentals. 

Moreover and for the shortened trading week to come, the S&P 500 weekly expected move is $41/points, down from last week’s expected move of $46/points

Market Liquidity

Earlier in the trading week that was, Finom Group subscribers were privy to some insightful research reporting from J.P. Morgan’s quant team, led by Marko Kolanovic, CFA. The report discussed volatility and liquidity and how the two go hand-and-hand in many respects. Additionally and what may prove of great consideration is the notion of liquidity with respect to the actions of the Federal Open Market Committee and central banks around the globe. As the U.S. has embarked on Quantitative Tightening, many conclude that such activity drains or reduces market liquidity. However, nobody has yet to formulate or indicate the mechanism for which such liquidity is drained outside of sentiment.

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