Week Ahead: After New Highs, Stocks Could Be Pressed By U.S.-Iran Tensions
Investing.com | Jun 23, 2019 14:02
- Geopolitical tensions weigh on previously soaring stocks
- More than half of S&P 500 sectors showing weakness
- Oil up in the short-term but down longer term
U.S. stocks retreated on Friday, pressured by rising fears of possible military retaliation from the Trump administration against Iran after it downed a U.S. drone on Thursday, deflating earlier tailwinds provided by dovish central banks. The S&P 500 hit a second straight all-time high intraday on the final trading session of the week, but closed lower. Conversely, oil surged on the possibility of a supply disruption resulting from the situation.
Still, the stamina of equity investors in withstanding the escalating U.S.-Iran situation is a testament to market strength. Moreover, it demonstrates the importance of the Federal Reserve’s path to interest rate reduction. Had the Fed not lost its infamous patience with the market (and possibly with U.S. President Donald Trump), investors might have been seeing steep declines this past week. Another catalyst that did not materialize to impact last week's market activity: a resolution to the ongoing U.S.-China war trade war, which has been dominating headlines since March 2018.
Nevertheless, reports emerged yesterday that though President Trump called off a planned strike against Iranian targets, at the same time the U.S. conducted "online attacks against an intelligence group that...officials believe helped plan the attacks against oil tankers in recent week." These cyberattacks were meant as retaliation for the drone attack as well, potentially setting the stage for escalating hostilities in the Middle East in the week ahead.
h2 Multiple Technical Warning Signals For Equities/h2
While anything could still happen amid numerous, conflicting drivers including monetary policy, trade disputes, weakening economic data—and now a U.S.-Iran military face-off, technical analysis is providing multiple warning signals.
The SPX closed 0.13% lower on Friday for the first time during the past week. The bearish implication is underscored by the fact that the benchmark index slumped after posting a new intraday high.
The Dow Jones Industrial Average temporarily bested its Oct. 3 closing record on Friday as well, but finished in negative territory, missing a record both on a closing- and intraday-high basis. The mega-cap benchmark whipsawed to finish the week, with volumes higher than the 30-day average, which is typical of quadruple witching days when futures and options expire.
Right now, six of the S&P 500’s 11 sectors are flashing warning signals, while only one sector, Energy, looks strong, +0.76%, but only in the short-term. Nonetheless, as discussed below, it continues to provide long-term indications of weakness.
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Real Estate underperformed (-1.14%), even after Friday’s Existing Home sales beat expectations, jumping 2.5% from -0.4% a month earlier, blowing well past the 1.2% anticipated. Even before the upside surprise was released, Kenneth Zener of KeyBank Capital Markets told CNBC’s “Closing Bell” that, due to lower rates, he expects growing margins from the homebuilders. His positive outlook was based on the 1.2% forecast.
Based on Western technical analysis, the real estate sector completed a powerful island reversal, which occurs when prices are surrounded by gaps, demonstrating there was enough supply to satisfy all the demand and then some, provoking sellers to lower offer prices to find new willing buyers. In Japanese candlesticks, the pattern is referred to as an evening star, a three-day pattern whose reversal signals a decline.
This evening star is potentially exceptionally bearish. Friday’s third candle didn’t just engulf Wednesday’s first candle, it virtually wiped out the entire week’s advance. Given that the potency of the bearish pattern is predicated upon the preceding rally, this pattern is particularly ominous after a record high is scored.
And, Real Estate wasn’t the only sector sending out warning signs. Consumer Discretionary, (-0.40%), also formed an evening star (though not an island reversal, which requires that gaps occur both on up and down days, while the evening star only requires that the second day be on a gap and that the third day wipe out at least half of the first day’s advance).
Industrials, (-0.52%), may be forming the right shoulder of a H&S top in place since February; Materials, (-0.30%), developed a weekly high wave candle, which projects both fear and a lack of direction, right on the downtrend line since January 2018.
Technology, (-0.45), a former market leader, on Friday confirmed Thursday’s bearish dragonfly, which itself confirmed the resistance of the May 1, record peak. Utilities, (+0.40%), produced a bearish confirmation for Thursday’s hanging man—which formed its record high—with the same psychological implications as that of the real estate subindex, in which the greater the significance of the preceding rally, the greater the potential for the bearish pattern’s reversal.
Energy's outperformance on Friday was echoed in its weekly numbers, (+4.18%). Technically, the subindex found resistance by the 50 DMA after reversing from a downtrend to an uptrend in the short-term. However, over the longer term, the subindex has, for the third time since 2016, slipped from its uptrend line, in place since 2002. The weekly chart provided a Death Cross, after the 50-week MA slumped below the 200 DMA for the first time since 2009, ahead of a 33% plunge in less than five months. On the other hand, the current U.S.-Iran clash has pushed the monthly price above the 200-month MA.
h2 Dollar, Yields Decline; Gold Beyond $1,400; Bitcoin Passes $10,000/h2
On Thursday, the U.S. 10-year Treasury yield dropped to 2.0%, the lowest level since November 2016, before rebounding to 2.06%.
Still, though this is low, U.S. rates are nonetheless higher than most developed countries. As such, foreign demand for U.S. Treasuries will likely keep long-term rates low, while supporting the dollar—which will help prolong the bull market by providing inexpensive credit to businesses and consumers. Technically, we consider this a return move after completing a rising, bearish flag, suggesting yields will return to a decline within their downtrend.
The U.S. dollar fell for the third straight day after Wednesday's FOMC Statement indicated lower interest rates were upcoming. That, in turn, pushed gold into the $1,400 area, for the first time since 2013.
The USD lost a total of 1.45%, after the Fed signaled it was ready to cut rates. Recent inflation readings have been falling short of the Fed’s 2% target, leading the U.S. central bank to drop its inflation forecast from 1.8% to 1.5%.
Not enough inflation signals that demand for goods and services is decreasing, which could lead to sluggish wage growth, reduced lending and weaker economic activity. The Fed has said it would cut short-term interest rates to boost demand and reset price levels closer to its target. Technically, the greenback fell below an uptrend line since January, closing below the 200 DMA for the first time since Mar. 20, the second time this has happened since May 2017.
After hitting $11,000 for the first time since March 2018, Bitcoin retreated, but kept gains above $10,700. The cryptocurrency's spike has been led by Indian investors amid a government crackdown. Also moving the digital currency is Facebook’s (NASDAQ:FB) just announced own effort in the digital space, Libra.
Technically, we’d be more comfortable to wait for a pullback toward at least the $9,000 level, after the price rocketed above its uptrend line and Friday’s shooting star compounded by potentially weakening momentum.
Oil jumped 9.37% during the course of last week, with much of the gains made on Thursday, via a +5.38% surge after Iran's attack, building on expectations for an OPEC production deal extension. Technically, it might be wise to avoid the commodity at this point. On Friday the price formed a high wave candle as it neared the downtrend line since Apr. 23 and the 100 DMA found resistance by the 200 DMA.
h2 The Week Ahead/h2All times listed are EDT
h3 Monday/h34:00: Germany – Ifo Business Climate Index: expected to be 97.4 from 97.9 previous.
h3 Tuesday/h310:00: U.S – CB Consumer Confidence: likely declined to 132.0 from 134.1.
10:00: U.S. – New Home Sales: seen to rise to 686K in the month of May from 673K a month earlier.
13:00: U.S. – Fed Chair Powell Speaks: investors will look for any clarification regarding just how much patience Powell and company may have lost.
22:00: New Zealand – RBNZ Interest Rate Decision, Statement and Press Conference: rate expected to remain at 1.50%.
h3 Wednesday/h35:15: U.K. – BoE Gov Carney Speaks, Inflation Report Hearings: markets will look for additional insight into how the current Brexit confusion is impacting the U.K. economy.
8:30: U.S. – Core Durable Goods Orders: predicted to edge up to 0.1% from 0.0%
10:30: U.S – Crude Oil Inventories: previous reading was -3.106M bbs.
h3 Thursday/h38:30: U.S – GDP: likely to remain flat at 3.1%.
10:00: U.S. – Pending Home Sales: forecast to jump to 1.1% from -1.5%.
h3 Friday/h34:30: U.K. – GDP: economists expect the measure to remain steady at 1.8% YoY; flat at 0.5% QoQ
5:00: Eurozone – CPI: seen to remain at 1.2% YoY, with Core CPI rising to 1.0 from 0.8% YoY.
8:30: Canada – GDP: expected to fall to 0.2% from 0.5% MoM, while rising to 1.5% from 1.3% YoY.
h3 Saturday/h321:00: China – Manufacturing PMI: probably inched up to 49.6 from 49.4, still within a contraction phase.
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