U.S. stocks were mixed after the government said hiring bounced back in April. That suggests the economy should start growing faster in the next few months after a sluggish start to the year. IBM is slumping after billionaire investor Warren Buffett said he sold a large part of his stake in the company.
Global Economy – Global equities remain on edge as the markets ponder whether there is some macro-level significance to Thursday’s plunge in commodity prices such as weakening global economic growth, or whether the sell-off was simply driven by specific factors in each commodity market.
The markets are confident that centrist Emmanuel Macron will win Sunday’s French presidential against far-right Marine Le Pen since the polls are holding steady at a wide margin of about 60%-40%. That spread is much wider than the 1-3 point poll spreads for the Brexit and Trump votes, meaning that an upset by Ms. Le Pen would be far more difficult than it was in the case of Brexit and Trump. The latest betting odds at Oddchecker are 91%-14% in favor of Mr. Macron.
Asian stocks closed mostly lower, led by a drop in the Shanghai Composite. Chinese stocks were hit again today by concern about the government’s crackdown on leverage and also about Thursday’s rout in commodities. There are some geopolitical tensions this morning after an overnight claim by North Korea that the CIA and South Korean intelligence tried to assassinate Kim Jong-un with a “bio-chemical attack.” That charge was likely just paranoid propaganda but North Korea could nevertheless be planning to use the charge as a justification for another weapons test or some other type of provocation.
U.S. Economy – Employers in the United States added 211,000 jobs in April, according to the Labor Department. That was a relief to investors who were concerned about slower hiring and economic growth over the first three months of the year because. Wages grew at a slower pace, however.
We have Q1 results from 358 S&P 500 members that combined account for 78.2% of the index’s total market capitalization. Total earnings for these 358 S&P 500 members are up +12.9% from the same period last year on +7.9% higher revenues, with 74.3% beating EPS estimates and 65.9% beating revenue estimates. For Q1 as a whole, combining the actual results from the 358 S&P 500 members that have reported with estimates from the still-to-come 142 companies, total earnings are expected to be up +11.9% on +6.2% higher revenues, with Finance, Technology, Industrial Products, Basic Materials, and Business Services on track to achieve double-digit earnings growth.
Total Q1 earnings for the 358 index members that have reported results are up +12.9% from the same period last year on +7.9% higher revenues, with 78.2% beating EPS estimates and 65.9% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is currently 52.8%.
Market Sentiment – Bond prices were little changed. The yield on the 10-year Treasury note remained at 2.35 percent. High-dividend stocks did fairly well Friday as telecommunications company’s recovered from a hard loss the day before, and utility companies also rose. Banks traded lower. According to financial futures markets, the probability of a rate hike at the June 14 meeting is 74%, which compares to 78% yesterday. Price began trading lower once again, as the prospect of higher rates is very likely in the near term. The long term trend remains lower and I’m expecting either more downside or congestion near the current price level, till there’s a major catalyst such as increased Global friction or something completely unforeseeable that the markets have not assimilated into their price action.
Expect price to remain near the current price level and drift lower over the next few sessions and remain predominantly within the price range between 154 and 146 level over the near term time frame.
Stock Market Analysis – Stocks are cooling off after a strong run last few weeks. NASDAQ remains overbought and should see some selling pressure over the next few weeks, since in addition to divergence, we are seeing sharply overbought levels in the 10 day RSI.
Expect price to move down to the 5900 level before rising back up, since that would move right in line with the 50 day moving average to the downside. To confirm my analysis – if you take a look at the very long 10 year chart of momentum studies, you will see that each and every time over 80% of tech stocks rise above the 200 day moving average, the odds of seeing selling pressure is increases substantially. The most likely scenario is mild selling pressure over the next month or longer, till the percentage of stocks trading above the 200 day line moves to 50th percentile or possibly lower.
This would coincide with QQQ trading down to the 5900 level, which is the precise point of the 50 day moving average. Overall, I’m not expecting volatility to increase too much, since VIX levels are near historic lows, which tells us that there’s very little fear in the market sentiment at this time.
Typically, when markets start to panic, VIX jumps above 20. Currently, VIX is near 10 level and unless there’s heightened sensitivity to either North Korea or Syria in coming days or weeks, we can expect VIX to remain near the current level.
The broader market is weaker than the tech sector and several key sectors such as retail, materials and energy are trading near the 50 day line, which is causing the NYSE to weaken. If the tech begins to give in to minor selling pressure, we will see increased downside in the NYSE, which will also impact the Dow and SPY to a great extend. Don’t expect a runaway rally, with the current market environment and overbought momentum levels.
Courtesy of Market Geeks