The 1-Minute Market Report - May 31, 2019

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Includes: BIBL, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PMOM, PPLC, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SFY, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USMC, UWM, VFINX, VOO, VTWO, VV, ZF
by: Erik Conley
Summary

The Chart of the Week shows two items of note. First, the daily closing price of the S&P 500 is now below the 200-day simple moving average.

Secondly, the actual Death Cross hasn't yet arrived. This is the relationship between the 50-day and 200-day simple moving averages.

The Elliott Wave guys (pure chartists) say the market could rally to 4,000-4,400. I'm not so sure about that. I think 3,000-3,200 is more realistic.

What happened last week.

What we're watching for next week.

The market took another hit this week. May was a bad month for investors. A look at the data might help put things in perspective.

Chart of the Week - The Dreaded "Death Cross"

Let me stipulate upfront that I am NOT calling the top of this magnificent bull market. I merely want to point out the condition of the current market environment.

The Chart of the Week shows two items of note. First, the daily closing price of the S&P 500 is now below the 200-day simple moving average. Why is this important? Because today is the last day of the month, and there is a significant cohort of traders and analysts who base their equity exposure on this metric.

This metric has a spotty record when viewed from a long-term perspective, but nevertheless, it carries a lot of weight in the short to medium term. My point is that chart watchers are likely to interpret this as a sell signal.

Secondly, the actual Death Cross hasn't yet arrived. This is the relationship between the 50-day and 200-day simple moving averages. As of today's close, the 50-day stands at 2,870 and the 200-day is at 2,775. It will take a few more weeks of weakness in the market for this relationship to turn negative. If and when it does, there will be another round of selling by those of the technical persuasion.

Chart 2. The Inverted Treasury Yield Curve

The Treasury yield curve has inverted and it's getting worse. By itself, this indicator doesn't mean that much. But when paired with other signs of a weakening economy, it becomes more significant.

History tells us that the economy can continue to expand long after the first curve inversion. But ask yourself this question: How close to the recession line are you willing to go? Prudence calls for a gradual reduction of portfolio risk at the very least.

Chart 3. S&P periodic returns

The market is losing steam. The year-to-date gain has now dropped from 17.5% to 9.8%. Not a big deal in the grand scheme but worth watching. And the market is only up 1.7% from where it was 12 months ago. That's down from 17.5% recently. Pay attention. Look at these numbers and make up your own mind about what to do, or not do, to protect your assets.

Chart 4. Tracking the S&P 500 Over the Last 30 Days

May was clearly a disappointment for the bullish camp. They appear to be losing their dominance over the bears, but they are far from surrendering. I expect the bulls to muster the courage to mount a rally at least one more time before they finally run out of ammo in the war against the bears. Mean reversion is a bitch.

Final Thoughts

The Elliott Wave guys (pure chartists) say the market could rally to 4,000-4,400. I'm not so sure about that. I think 3,000-3,200 is more realistic. What would it take to drive the market to 4,000 and beyond? GDP growth in the range of 3-4% for one. Not likely.

A revival of earnings growth that can be sustained beyond a couple of quarters. Maybe, maybe not.

A favorable outcome (from the U.S. perspective) in the growing tariff wars with China and now Mexico? Possible, but who knows?

A bipartisan infrastructure bill passed by both houses of congress? Don't hold your breath.

But in the stock market, hope springs eternal. Until hope gets overwhelmed by mean reversion.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editor.