The market showed some possible signs of cracking this week. The US averages were down a little more than 1%, international markets were down only 0.18% and the bond index managed a 0.33% gain. What was most disconcerting was the performance on Friday, the market was up almost 1% but gave most of it back and ended up only 0.27%. That came after a brutal Thursday when the market fell 1.2%. Nevertheless, the market still has held support at $203.90 on the SPY.
While the market is up on a daily basis, the trend is still down on a weekly and monthly basis. Oil rose 8% to $39.72 per barrel. Analysts are starting to suggest that we have seen the low in oil.
FED
The Fed released the minutes from their meeting on March 16th. The minutes highlighted weakness in the global economy. The Fed will be taking a more passive approach towards raising interest rates. We are probably looking at one, maybe two increases for the year. It is possible that we don’t even see a single increase if the global economy remains shaky and overseas rates hover around the zero area.
EARNINGS
Earnings season starts Monday. Earnings are expected to decline for the fourth straight quarter. Energy earnings are expected to be negative. However, the earnings problem is bigger than just energy, take energy out and analysts still expect a drop of 4.2%. AAPL earnings should be down 19% year over year. 94 SP500 have issued negative guidance. For all of 2016, analysts are looking for an increase of 2.1% as the negative impact of falling oil prices and the rising US dollar begin to fade away. While analysts have been clearly negative on this past quarter, over the last four weeks they have actually raised earnings estimates for 443 companies in the SP1500 and lowered the forecast for 495. That is a much more balanced tradeoff between plus and minus revisions than we saw earlier in the year.
ECONOMIC REPORTS
Initial claims for unemployment insurance fell to 267,000 last week, down 9,000. The new global PMI reports came out and the number increased to 50.5 in March. The previous report in February was more negative and suggested a higher probability of a global (not US) recession. This report shows that the new orders component of the report rose to 51.2, a positive number that might indicate the global economy is on a slow mend. On the negative side, employment and exports were down. 70% of the countries reporting are in expansion territory, the highest number so far this year. There will need to be more follow through in future months to see if the recovery can sustain itself.
VENEZUELA / ARGENTINA
Problems continue in Venezuela. Fridays are now a holiday in Venezuela through May in an effort to cut energy production. Credit default swaps indicate a 72% chance of default in the next year and almost 100% over the next five years. On the other hand, Argentina which has started to implement a more free market economy is going to the market with $12b in sovereign debt in the near term.
SUMMARY
The market has been overdue for a pullback. It looks like we are getting close. If the SPY cannot hold support at $203.90 we will probably get the pullback. A small pullback at this time would be natural and would set the stage for the next leg up. A bigger pullback combined with weakening economic data could reignite recession fears.