The major U.S. stock indexes were mixed Friday as investors sized up the latest batch of company earnings. Real estate stocks lagged the most, while energy companies led the gainers as the price of crude oil headed higher.
Several technology companies were moving higher after reporting solid results.
Global Economy – Gains were limited on lingering geopolitical concerns after President Trump warned that a “major conflict” with North Korea was possible if diplomatic solutions fail.
Negatives for European stocks include weaker-than-expected UK Q1 GDP and rising inflation pressures after the Eurozone Apr core CPI rose a more-than-expected +1.2% y/y, the biggest increase in 3-3/4 years.
Asian market settled mixed as uncertainty surrounding the Trump administration’s trade plans and North Korean concerns limited the upside in stock prices.
The Bank of Russia cut its key benchmark rate by 50 bp to 9.25%, a bigger cut than expectations of a 25 bp.
Eurozone Apr CPI rose +1.9% y/y, stronger than expectations of +1.8% y/y. Apr core CPI rose +1.2% y/y, stronger than expectations of +1.0% y/y and the biggest increase n 3-3/4 years.
Japan Mar industrial production fell -2.1% m/m, weaker than expectations of -0.8% m/m.
U.S. Stock Market – The U.S. economy turned in the weakest performance in three years in the January-March quarter as consumers sharply slowed their spending. The result underscores the challenge facing President Donald Trump in achieving his ambitious economic growth targets.
The gross domestic product, the total output of goods and services, grew by just 0.7 percent in the first quarter following a gain of 2.1 percent in the fourth quarter, the Commerce Department reported Friday.
The slowdown primarily reflected slower consumer spending, which grew by just 0.3 percent after a 3.5 percent gain in the fourth quarter. It was the poorest showing in more than seven years.
Economists attributed the sharp slowdown in consumer spending to shrinking utility bills due to warmer weather, a drop-off in auto sales and a delay in sending out tax refund checks by the IRS, which also dampened spending.
Market Sentiment – Weaker than expected GDP data didn’t prevent bonds from breaking the recent lows. Typically, weaker than expected GDP data implies potential weakness in the economy, which typically causes FED to pause raising rates.
The negative GDP data should have caused bonds to spike higher. Instead bonds broke the recent low Friday morning and showed very little upside. This tells me that bonds are weaker than anticipated and the most likely scenario will be more downside, which implies higher rates, even though economy is lagging behind expectations once again.
Expect more weakness and inevitably price reverting lower or continuing to stagnate for the remander of the month.
The probability of a rate hike at the Federal Open Market Committee’s May 3 policy meeting is 5%, which compares to 3% on Thursday and the probability of a rate increase at the June 14 meeting is 75%, when 70% was predicted yesterday.
Stock Market Analysis – Stocks are showing very little directional bias, especially in light of weaker than expected GDP and renewed Global Friction. Major indices are stagnating after rallying sharply during the first half of the week but now appear to be looking for directional bias.
I’m anticipating price to revert lower and test the 50 day line over the next few weeks, which will undo the upside over the past few sessions and take stocks lower once again.
The fact that SP 500 failed to make new highs and weaker than expected FED data is going to cause institutional traders to pause aggressive accumulation, till stocks reach oversold price levels, which should happen once we break through the downside of the 50 day line once again.
To confirm my analysis we have to focus on the tech sector, which till now has been giving SP 500 stocks a strong boost. At the present time, the Tech sector is overbought and price is diverging strongly from the 10 day RSI Oscillator, which tells me that tech is ovebought as well.
Expect minor downside to develop over the next few weeks across most sectors, as markets begin to regain balance once again.
Volatility is near historic lows, even though Global tension is on the rise, which tells me that major corrective pressure is more than likely not going to happen and we should expect more or less lack of direction in the coming days.
Earnings season is heating up and I believe we will see some increase in volatilty in the near term as a result, especially with stocks becoming stagnate once again.
Existing / New Position
MU showed slightly better relative strength in relationship to the overall market. SOX is not being accumulate by funds and that’s impacting MU. Options premium remains stable looking to see if volume picks up on Monday or if other stocks in the same sectors begin picking up momentum.
NTAP was stronger than expected on Friday and I want to see some institutional sponsorship over the next day or two. Volume is and we may see rotation out of blue chips and back into tech in the next few sessions.
Defensive stocks are rising and we have to be extra cautious since indices are overbought and are more than likely going to see selling pressure in the coming days.
I’m going to perform relative strength studies next 24 hours to see if the the long term trend remains stable in both.
I will update you tomorrow as usual.
Roger Scott