- One of the fastest rallies in history, after the strongest and quickest plunge will be tested
- Approaching tech earnings will have to be good enough to justify further rallies
- Oil could continue to fall
Ahead of a big week for technology company earnings reports, on Friday tech shares led U.S. indices higher. And though the oil market is broken, and as of last Thursday's Initial Jobless Claims release a total of 26 million Americans are now out of work, all four major U.S. indices—the S&P 500, Dow Jones, NASDAQ Composite and Russell 2000—climbed higher during the final day of the trading week.
Adding to the precarious situation, coronavirus headwinds continue: with more than 2,900,000 reported cases worldwide and 203,332 deaths at the time of writing, ongoing geopolitical risks remain in the forefront.
Most Unclear Market Of All Time?
Though tech stocks led U.S. indices higher on Friday, propelling the NASDAQ to a gain of 1.65%, with the FAANGs and mega cap peers set to release quarterly earnings in the coming week, the small cap Russell 2000 was the big leader; it finished just a hair shy of a 2.00% boost.
The SPX rose 1.39%, with all 11 sectors in the green. Real Estate lagged, (+0.36%); Tech shares led, (+2.12%).
Still, Friday's exuberance didn't save stocks from slipping on a weekly basis. The S&P 500 dropped 1.32% on that metric, paring about half of the prior week’s advance. The Dow Jones Industrial Average fell 2.02%, wiping out almost all the previous week’s gains. The NASDAQ Composite's activity on the final trading day of the week was no more than a hiccup; the tech heavy benchmark retreated 0.18%. The Russell gained 0.32%, outperforming on a weekly basis as well as on Friday.
We find it surprising that small caps enjoyed the most demand in this perilous economic and market environment. To be honest, we consider it nothing more than a sign of unhinged greed.
Though we have been bullish about the equity market since April 7, we have also been outspoken about our hating to be so. We can't help but wonder how much of the recent, explosive rally was simply a smart-money short squeeze, followed by dumb money.
Is such a large and rapid stock market rally, right after the fastest 30% selloff in history even sustainable? How about during the worst global pandemic in 100 years which has forced the U.S. and other world economies to slow to a halt for the first time in history?
Plus, do we have a cure for COVID-19? What about a vaccine? Any solutions? According to the U.S. and other governments, yes: we have stimulus, stimulus and stimulus.
But, when yields, including for the benchmark 10-year Treasury, are falling back toward all-time lows, and front month futures in the oil market were last week in negative territory; plus government and corporate debt keeps mounting and the U.S. is experiencing its highest unemployment levels since the Great Depression, we can't help but be concerned...very concerned to put it mildly.
In our view, this may be the most unclear market of all time, with too many conflicting signals that in the aggregate don't paint a positive picture. Before we can begin to assess the economic impact of the coronavirus, it needs to be over, and no one yet knows when that might be. The World Health Organization (WHO) has warned that having contracted and recovered from the virus is no guarantee one can't catch it again. So why are investors still bullish?
Not all of them are. According to a Bloomberg report, billionaire investor “Carl Ichan isn’t buying stocks right now. He’s hording cash.” Icahn says equities are overvalued and doubts the economy can be turned on “like a spigot.”
So, earlier in the month we provided a bullish call for equities. Do we continue to maintain it?
The S&P 500 is up 26.79% from its March 23 bottom, only 1.33% from its April 17 high. Before that, the index plunged 33.92% since its Feb. 19 record close.
On April 7 we reversed our bearish call stating that “the S&P 500 just completed a short-term uptrend within the long-term downtrend.” The benchmark is now 6.5% higher than it was when we made our early April uptrend statement, and it has gained as much as 8.1% as of the April 17 high.
Nevertheless, though it's still within a short-term uptrend, it has completed a rising wedge, bearish after the preceding downturn, which included a Death Cross.
On a daily basis, even after one of the SPX's strongest rallies, the VIX remains at a level similar to where it was during the notorious, 2018 Christmas Eve rout, one of the worst on record, when stocks barely missed sliding into a bear market.
Is the completed Bearish Wedge, which coincides with the most bets against equities—even as they jumped so much since the previous time stocks were at the edge of collapse—trying to tell us something? On a weekly basis, the volatility index, aka the “fear gauge,” is still the highest since September 2011.
The dollar's four-day rally ended on Friday.
Should the greenback continue climbing past 100.93, it would be the beginning of a new uptrend line (currently our drawing of the dotted line) putting the U.S. currency back within the rising channel, aiming for the March 19 high. However, if it drops below 99.00, it will continue to drift.
Gold slumped to finish out last week's trading.
Although prices bounced off the neckline of a H&S continuation pattern, the RSI is seen to be forming a H&S top, suggesting momentum is weakening. Plus, the MACD already provided a sell signal. However, we will maintain our bullish stance on the yellow metal as long as the April 21, $1,666.20 support holds.
Bitcoin has been climbing for six straight weeks. However, its falling channel since the June 2019 high puts risk to the downside, providing resistance at the $9,000 level. As well, both MCD and RSI are in bearish patterns.
After a disastrous start last week when May futures totally collapsed, taking the rest of the oil market along, WTI climbed for a fourth day.
Though the commodity closed below the crucial $20 level, and the MACD and RSI got stuck at respective resistances, which shows risk for oil remains to the downside, we consider this an ideal shorting opportunity, especially from a risk-reward perspective.
Week Ahead
All times listed are EDT
Monday
23:00: Japan – BoJ Monetary Policy Statement and Outlook Report
Tuesday
10:00: U.S. – CB Consumer Confidence: expected to contract to 88.0 in April from 120.0 in February.
10:19: Japan – BoJ Interest Rate Decision: the central bank is anticipated to hold steady at -0.10%.
18:45: New Zealand – Employment Change: anticipated to have increased to 0.3% QoQ from 0.2% previously.
21:30: Australia – CPI: seen to have fallen to 0.2% from 0.7%.
Wednesday
8:30: U.S. – GDP: expected to plunge to -4.0% from 2.1%.
10:00: U.S. – Pending Home Sales: seen to plummet to -10.00% from 2.4%.
10:30: U.S. – Crude Oil Inventories: presumed to jump to 15.150M from 15.022M.
14:00: U.S. – Fed Interest Rate Decision: rates are expected to remain steady at 0.25%
21:00: China – Manufacturing PMI: estimated to have declined to 51.0 from 52.0, still within growth territory.
Thursday
3:55: Germany – Unemployment Change: seen to surge to 75K from 1K.
5:00: Eurozone – CPI (YoY): probably declined to 0.1% from 0.7%.
7:45: Eurozone – ECB Interest Rate Decision: anticipated to remain flat at 0.00%.
8:30: U.S. – Initial Jobless Claims: markets remain riveted by this metric; the sum of four previous weekly releases has hit 26 million.
8:30: Canada – GDP (MoM): probably remained at 0.1%
8:30: Eurozone – ECB Press Conference
Friday
4:30: UK – Manufacturing PMI: expected to edge to 32.8 from 32.9.
10:00: U.S. – ISM Manufacturing PMI: seen to have fallen to 36.7 from 49.1.