The stock market rally has been relentless, but it’s time for the S&P 500 (NYSEARCA:SPY) to pause.
We should see a turn lower this week (pullback), before bulls re-exert their force.
Investors have high hopes for corporate earnings… will the trade war get in the way?
S&P 500 Cycle Outlook for the Week of July 16, 2018:
1. The stock market rose last week, with the S&P 500 (SPX) up 41 points to 2801, an increase of 1.5%.
2. As stocks climbed higher in anticipation of another great earnings season, they managed to reconcile Trump’s plans for another $200 billion in tariffs.
* Our projection this week is for the stock market to decline to 2760 and then resume its bullish move higher.
S&P 500 (SPX) Daily Chart
Last week investors kept a cool head in the face of a trade war that continued to escalate. This may have been due to an expectation of another strong earnings season to provide the catalyst behind the rally.
This is no surprise as the latest economic data continued to outperform expectations. For example, the government estimated 6.638 million job openings for June, which was lower than the previous month but still higher than the average estimate. Producer inflation data also came out bullish, while consumer inflation remained unchanged.
On Tuesday evening, the White House said it would enact a 10% tariff on $200 billion worth of Chinese imports. Yet it’s not clear how the Chinese government will respond proportionately, as the value exceeds total US exports to China. The bottom line is that the market took the move as a signal that Trump was not slowing down in his trade policy implementation. By the end of the Wednesday trading session, the market had declined a total of 0.7%.
For his part, House Speaker Paul Ryan registered his disapproval saying, “I don’t think tariffs are the right way to go.” Senator Orrin Hatch was more blunt, calling the policy “reckless”.
Meanwhile, China expressed a desire to accelerate its talks with the 16-nation Regional Comprehensive Economic Partnership. The objective is to safeguard multilateralism and maintain free trade in Asia. At the same time, the US and EU filed a complaint to the WTO related to China’s weak enforcement of intellectual property rights.
In any case, Treasury Secretary Steve Mnuchin told the House Financial Services Committee, “I don’t think we’re in a trade war,” instead referring to it as “situation of trade disputes”. He did acknowledge that the trade talks had broken down and that there was no clear path for resolution.
Coming back to earnings, the Financial Select Sector Fund (XLF) was down 0.5% on Friday, after multiple banks reported earnings. While they generally beat Wall Street expectations, their stock prices had shed between 0.5% to 2% in value.
With equities up last week, gold was down -1.0%, and oil was down -4.4%, the euro was down -0.5%, and bonds were up 0.4%.
Our Projection for the S&P 500 This Week
Our analysis of the S&P 500 is for a minor pullback in the stock market before resuming what will likely be a move to new highs. More specifically, for next week we expect a move lower to 2760, which is a rising Fibonacci level.
After this market cycle ends, we will adjust our expectation to bullish, with an intermediate projection for the market to reach 2872, perhaps by August. Once it does, we will look closely at how it acts and revise our expectation accordingly.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
