Weighing The Week Ahead: Is There A New Message From The Markets?

We have a light economic calendar and a short week. We’ll get earnings reports from another 10% of S&P 500 companies. With plenty of time and little fresh information, I expect plenty of pure speculation about the state of the market. This commentary will have a broad theme, with pundits asking:

Is there a new message from the markets?

Last Week Recap

In my last edition of WTWA I took note of the growing emphasis on technical indicators, even for long-term investors, asking whether the 200-day moving average should be considered. As often happens these days the stories focused on political developments and the surprise Amazon (AMZN) decision not to build a second headquarters in New York. The S&P climbed above the 200-day MA on Friday without much fanfare. Next problem, please?

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.

Stocks gained 2.5% on the week and the trading range was only a touch wider, 2.66%. You can see volatility comparisons in our Quant Corner (below).

For some additional perspective, here is the chart of the economic expansion.

This chart makes it clear that the rally, while long and strong overall, include major pauses and a few drawdowns along the way.

Personal Note

I am off duty next weekend. I’ll try to post an indicator update, but no promises. I asked Mrs. OldProf if she wanted to pinch hit for me, but she noted that Warren Buffett’s annual letter would be released next Saturday. She didn’t want to compete with that. As always, this will be great reading for investors.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

When relevant, I include expectations (E) and the prior reading (P).

New Deal Democrat’s high frequency indicators are an important part of our regular research. This week’s update notes that short-term and coincident indicators have turned negative, while the long-term group is still neutral. He provides the following “note of caution” in his conclusion:

A special note of caution this week: In the past several weeks a whole variety of both weekly and monthly indicators in several time frames have abruptly cratered. Part of that may be due to the “polar vortex” giving rise to 30-year low temperatures in part of the country, but I suspect that the effects of the government shutdown have been more pronounced than almost everybody thought. A similar pattern happened during the 2011 “debt ceiling debacle.” If so, the coincident indicators in particular should begin to bounce in the next several weeks.

The Good

  • The government shutdown controversy ended in compromise. This is great news for the economy and for investors.
  • The JOLTS report showed continuing labor market strength. (Sobert Look's The Daily Shot).

  • CPI and PPI both continued to show a tame increase of 0.2% for January. The PPI core was 0.3% while the headline was -0.1%.
  • Earnings reports continue to beat expectations at a rate that is close to the five-year average. Earnings are a touch below with a 70% beat rate but revenues are above (62%). John Butters (FactSet) points out the much-improved reaction to these reports, both beats and misses.

  • China/US trade. The overall news was mixed, but those worrying that the 90-day deadline was too short learned Trump might extend March 2 trade deadline. Or you could have gotten this “news” on December 6th. Below is a portion of my post on the China situation. The rest of the table is available here, along with some helpful conclusions about what to expect.
Issue Fast – Traders Slow – Investors
G20 Meeting Not specific enough. Reasonable outline with some initial agreement.
90-Day Deadline Too many issues to resolve in 90 days. No firm schedule. A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.
  • Mortgage rates continued to decline.

  • Michigan sentiment registered 95.5 [E 94 P 91.2]. Jill Mislinski has the story, including the low inflation expectations. As usual, she combines many key variables in a single chart.

The Bad

  • Initial jobless claims again moved higher – 239K versus a forecast of 225K and prior of 235K.
  • The NFIB Small Business Optimism Index pulled back further from recent highs – 101.2 versus prior of 104.4.
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