Current Market Cycle Appears To Be Topping Out
Steve Miller | Apr 28, 2019 08:26AM ET
- The S&P 500 (SPX) rose by 1.1% last week, up 32 points to 2940
- Stronger than expected economic growth propelled stocks higher
- Our projection this week is for a small decline in the stock market, followed by a pop to the upside
The stock market posted modest gains last week, as the focus moved from geopolitics to earnings and ultimately pushed stock indexes to new all-time highs, as I pointed out in the latest Market Week show.
The majority of companies continue to beat earnings and sales expectations, however, it is notable that they are beating estimates that have been consistently lowered. Just this quarter, 32 companies in the S&P 500 have guided earnings lower, compared to only 6 who has raised guidance, according to FactSet.
On Wednesday, chipmaker Xilinx (NASDAQ:XLNX) beat expectations for both earnings and revenue but perhaps not by as much as Wall Street had hoped for, as the stock fell by 17%. In fact, this appears to have had broader implications as the semiconductor sector (SMH) was down by 3% from that point.
The big economic news though was on Friday when Q1 GDP exceeded expectations with 3.2% annualized growth compared to expectations of 2.0%. This was due in part to higher than expected government spending at the state and local levels. In any case, the news pushed stocks higher by 0.5%, even as the 10-year notes were also higher.
The stronger growth though creates a quandary for the Federal Reserve who recently paused its path of increasing interest rates due to expectations of slower growth. The central bank will meet this week to discuss its economic outlook.
S&P 500 (SPX) Daily Chart
Turning forward, our approach to technical analysis uses market cycles to project price action. While strong upside momentum has carried stocks higher for the better part of this year, we believe this may be starting to wind down.
Our analysis of the S&P 500 is for stocks to begin to roll over, within the context of its current intermediate cycle, shown on the chart above. For this week, we see a small blip lower and then a move back to the upside, as a new minor cycle begins.
For the remainder of May and possibly into June, we believe downside risks will increase, based on longer-term market cycles. Yet once this correction is over, our call is for another upside move into the latter part of this year, based on the longer term market cycles.
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