I wrote an article for Seeking Alpha back on December 28, and it was about what I expected to see happen in the first quarter. At the time there were 479 S&P members in oversold territory based on the daily stochastic readings. I commented that, “Stocks are tremendously oversold at this time, and I expect the indices to bounce in the coming weeks.”
I also made points about how the fourth quarter of 2018 compared to the bear markets of 2000-2002 and 2007-2009. In both of those instances, the market did rally at some point in the first quarter and I was looking for the same thing this time around. What I didn’t expect was the strong move that we got.
Watching Bloomberg Television over the last week, I learned that January was the best monthly performance for the S&P 500 since October 2015. It was the best monthly performance for the Nasdaq since October 2011. And it was the best monthly start to a year since 1987. Those are some impressive feats.
Looking at the indices, the S&P gained 7.87% during the month of January and the Nasdaq Composite gained 9.74%. The Russell 2000 had the best performance of the main four domestic indices with a gain of 11.19% and the Dow lagged slightly, but still tacked on 7.17%.
Some of the concerns I expressed in the previously mentioned article were resistance levels the overall market would have to break through, and I wrote specifically about the S&P. The index blew through one area of resistance that I was watching and that was the 104-week moving average. I use the unorthodox moving averages of 13-week, 52-week, and 104-week because they represent specific time periods—one quarter, one year, and two years.
We see in the chart that the S&P moved through the 104-week rather easily a few weeks ago. The index is still below the 52-week moving average, but that is the last resistance level, at least from a moving average, that’s ahead.
If the index moves through the 52-week, the next line of resistance is at the all-time high of 2940.91 that was hit in September.
Where We Are Now
The market rally over the course of the last month has faced some hurdles. The earnings season has been mixed with Apple (Nasdaq: AAPL) warning on January 2, and then disappointments from the likes of Caterpillar (NYSE: CAT), Netflix (Nasdaq: NFLX), and Intel (Nasdaq: INTC). We also got a warning from NVIDIA (Nasdaq: NVDA) on the same day Caterpillar disappointed.
Those disappointments were countered by positive surprises from the likes of Texas Instruments (Nasdaq: TXN), IBM (NYSE: IBM), and Facebook (Nasdaq: FB).
The market also had to deal with the partial government shutdown that turned out to be the longest one in history. The trade war with China is ongoing, but talks last week seemed to indicate that there is some progress being made.
One area of concern that seems to be on the backburner for now is the Fed. The announcement from last week indicated that the Fed would not make any more hikes for some time and that they would slow down the balance sheet sales. This information was greeted with enthusiasm by investors.
Where I Think We Are Headed
I am still concerned about the S&P meeting resistance from the 52-week and you can see on the chart above that the overbought/oversold indicators are approaching overbought territory rather rapidly after gains in five of the last six weeks.
The trade war with China is still a concern. Even if a deal is reached, it isn’t like a light switch where you flip it and immediately get the light. Once a deal is reached, it will take some time for companies to determine how demand has changed as a result of the spat.
Apple pointed to slow sales in China as one of the main reasons for the lowered forecast at the beginning of January. Even if a deal is struck between the U.S. and China, there aren’t going to be millions of Chinese people lining up to buy iPhones the next day. China’s economy was slowing before the trade war and the tariffs and other tactics accelerated the slowdown. Caterpillar and NVIDIA also spoke of slow China sales as a factor in their earnings disappointment and earnings warning.
The reopening of the government was a temporary deal and there is another showdown looming in a few weeks when the debt ceiling will need to be raised. If President Trump and Republicans insist on an allocation for a border wall, the Democrats have already indicated that it won’t be there. We could be looking at another partial shutdown.
One economic indicator that I watch and have mentioned in previous articles is the Consumer Confidence Index. The January reading came in at 120.2 and that is 12.8% below the peak reading of 137.9 in October. My studies of the Consumer Confidence Index show that when the index reaches an extreme high and then falls by more than 10%, it is a bad sign for the market. But this isn’t the type of indicator where you run out and sell everything.
The best way to describe my current thoughts on the market is that I am cautiously optimistic. The earnings reports have been mixed, but not terrible. An announcement that there is a deal between the U.S. and China will likely create another round of buying and could drive the S&P above the 52-week. That would remove the last technical resistance level.
The possibility of long-term ramifications from the trade war and shutdown could impact first quarter earnings when we start getting those results in April. The U.S. economy isn’t slowing as much as China’s, but it is unlikely to post growth rates in 2019 as high as the ones we saw in 2018. Personally I think the 3.0% annualized GDP growth rate we saw in the third quarter will likely be a high-water mark for the next few years.
I am not convinced that the rally since Christmas Eve is nothing more than a bear market rally, but I am also not convinced that the worst is behind us now. I think the next few years will be a tough environment. The difference in performances among individual stocks and the different sectors is likely to be wider than what we saw during the overall move higher in 2017 and in the middle part of 2018.