Technically Speaking For The Week Of June 4-8

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IJH, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Hale Stewart

Summary

Trade tensions are slowly mounting.

Oil has pulled back from recent highs.

The markets will likely move higher next week.

The tension caused by the US's leveling of sanctions is slowly escalating. It started with the Trump administration implementing tariffs on aluminum and steel. The US exempted numerous trading allies during initial negotiations. However, they went into full force on June 1 and were immediately met with smaller retaliatory measures from the EU, Canada, and Mexico. Our G7 "partners" have issued a communique criticizing these measures. On top of that, Trump has decided to take a confrontational approach to the upcoming G7 meeting in Canada - an approach that will probably not go over well. While we're not seeing large negative effects yet, this is certainly not a good development for the global economy.

Oil prices have retreated from recent highs and have broken the trend line that goes back to the last half of 2017:

This is a very welcome development. Oil price shocks are one of the primary causes of recessions, which means any drop helps to ease recessionary pressure.

And speaking of recessions, doesn't the current state of the labor market indicate that the recession is far off? While I recently argued that the current situation is great, others are a bit less optimistic:

In April 2000, when the unemployment rate last hit 3.8%, it was unable to maintain the low level for even a second month - jumping back up 0.2pp in May. Prior to 2000, a 3.8% unemployment rate was last seen in the late 1960s, when again the low levels proved difficult to maintain. In the 1960s, the unemployment skirted generally below 4.0% from 1966 to 1969. Though able to cling to a low level for several months, this period ended with a swift upward jerk - rocketing up 2.6pp in 1970.

Further, through comparing GDP year/year growth, it can be seen that not only were these periods of low unemployment unsustainable, but they also were precursors to marked slowdowns in economic output growth.

Given this history, May's low unemployment rate could be heralded as an early warning sign of an overheating labor market and a potential softening in GDP growth in the next few years, if mounting wage pressures push up inflation and in turn the cost of investment. However, to assume that these historicals are predictive would disregard the many shifts in the labor market outside of a falling unemployment rate.

All of these observations are spot-on. And while the labor market is in great shape, one could describe the current situation as "there is only one way to go from here, and that's down."

The Markets

Factset is projecting solid earnings growth for the 2Q:

The estimated (year-over-year) revenue growth rate for Q2 2018 is 8.7%. If 8.7% is the final growth rate for the quarter, it will mark the highest revenue growth reported by the index since Q3 2011 (12.5%). All eleven sectors are expected to report year-over-year growth in revenues. Four sectors are predicted to report double-digit growth in revenues: Materials, Energy, Information Technology, and Real Estate.

This is obviously good news and, if it comes to fruition, will support higher stock prices.

Turning to the weekly performance numbers, we see it was a good week for the indexes:

The Dow led the pack, rising nearly 3%. The mid-caps - which are usually in the middle of the performance pack - were the second-best performer followed by the SPYs. For the first time in a long time, the QQQs weren't in the top three. The Treasury market was off modestly.

Let's start with the SPYs weekly chart:

This is a good chart. Prices moved sideways until mid-Tuesday when they had a two-day, four-point rally. Prices consolidated gains by falling back to the 200 minute EMA on Thursday and then moved modestly higher, but not above levels reached earlier in the week.

In contrast, we have the QQQs, which moved modestly higher earlier in the week but which dropped on Thursday, never really recovering.

The best chart of the week goes to the IJHs, which moved solidly higher for the entire week.

Pulling the lens back a bit farther, we see strong technical developments in the 30-day time frame:

Investors and traders typically hate consolidation patterns, preferring increased volatility (in either direction) because that's where higher profits lie. But there's an important side-effect of trading patterns: they create areas of technical support. And the longer they last, the better. The QQQ traded between 167 and 170 for about two weeks at the end of May, which will provide support for prices should they slip. The QQQs rallied, starting in late May. They peaked earlier this week and have since fallen back a touch. But overall, this chart is positive from a technical perspective.

The mid-cap ETF has the same pattern.

The daily charts are even better:

Both the IWMs (top chart) and IJHs (bottom chart) have moved through resistance to make new highs. The only negative on each chart is the momentum indicator, which is near topping out for both. It's likely that we'll see the QQQs and SPYs move higher as well.

So - what's on tap for next week? Probably more of the same. The only potential negative is that we're in the summer when trading desks start to empty for vacation. That can lower overall activity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.