Equities press higher on optimistic hopes. Elon Musk makes headlines once again.

2019 continues to be kind to equities, the wave higher continues this week. There is plenty of optimism in the US equities on the turn of the new year, leaving behind what was a gory holiday season.

The hypothetical promise of a trade deal earlier this week helped the buyers press equities higher. Although the volume was not that high on the press higher, the slow grind ultimately prevailed brushing off Thursday’s hiccup.

The details from the trade talks between the US and China was scarce, however a hint as progress was given after future deals were scheduled.

There was a slight rebound in Treasury yields and oil markets alleviating some worry of a future recession. Granted the year has just begun and we’re not even a month in, but the general sentiment out of the US is that they are willing to do anything to mitigate a potential recession after the holiday market massacre. Even the Fed seems to be cooperating with Trump’s wishes.

An ever lasting event of the US government shutdown is beginning to plague many US government employees affecting jobs numbers as they continue to go without paycheck. There is no real sign that either party is willing to budge and Trump insists on getting his way. Saudi Arabia is also trying to prop oil up to the $80.00 level, as we are up 19.5% since the turn of the new year in the energy market. The bullishness will be rivaled by the production cuts, and if they will be imposed.

FOMC meeting minutes hit the markets this week as expected and both Fed members and Powell were a little cautious with their word choice and future outlook. They were less hawkish, but their wording helped markets slide briefly. They took the passive approach when asked about future rate decision. Meaning that they wanted to see what the economy was doing when the time came to make the decision. However, they did mention the unwinding of the balance sheet, these two suggestions inferred to a potential weak economy that might not be able to handle another rate hike.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks up 3.68%
  • Technology up 3.22%
  • Financials up 1.37%
  • Retail up 3.37%
  • Utilities up 1.77%

Overview of key markets last week (bottom chart):

  • Crude oil up 7.26%
  • S&P500 up 2.55%
  • Silver was down 0.76%
  • Gold up 0.16%
  • US dollar down 0.53%

Tesla back in the news, more problems?

Years ago, Tesla was selling a fully autonomous (Full Self Driving/FSD) car package for $3000 and continued to take money for the promised car of the future. However, just this past October 2018, the option was removed from their website. This caused a lot of confusion and commotion. The company has now revealed that they are not as close to being able to deliver this promise. In fact, they are very far from their goal. The blame is placed on “regulations”.

The option is now again available under the “off the menu item” for a larger price tag, and a warning at that. The project is “very far away”, but you can still have it in a miscellaneous amount of time for $5000, an increase in price. Interesting.

The regulatory problems stem mainly from Europe, and some from the US. The full self driving feature in a vehicle is still illegal but there are hopes for legalization in the US.

Elon Musk and Tesla are trying to entice employees to guinea pig the FSD, by telling them that the $8000 cost would be waived if they volunteered to try the self-driving product. The fact that he’s using employees to beta test the feature is very Musk of Elon. Conflict follows this man wherever he goes.

Economic ressesion and market downturn still on the 2019 agenda?

The year of 2019 has held its ground and looks really good when compared to how 2018 ended. The slow trickle higher is prompting some seemingly unexpected euphoria in market participants. However is this just a little jolt before the markets completely slump and we enter the dreaded recession?

The Fed is in disarray after boasting the markets at their peaks in September and early October, and completely changing their economic outlook just weeks later. From an undeniably “strong” economy to increased concerns about the economies health. Many Fed members have expressed this feeling and have relied a lot of their data on unemployment figures. A false sense of reality. If the change in sentiment came so quickly, was the economy ever that strong to begin with. Not to mention the change in rate attitude. From a proposed three hikes in 2019 as markets were as optimistic as can be to a potential rate cut in 2019…

Not to say that the words “rate cut” were uttered but based on the speculative sentiment of the Fed dropping the number of rate hikes as the weeks go on, if markets continue to plummet and the economy is looking worse and worse, do not be surprised if quantitative easing takes place.

Not to mention global economic conditions seem to be worsening by the week. Which effects US markets and the US economy.

Taking China as a prime example, price stability is not well…stable. American economists do not take this seriously, but they should as a lot of information of the global economy and its futures is present in the Chinese Renminbi (RMB).

There is a restriction of Dollar flow into China, which has prompted the PBOC to constrain its own currency to fill the gap. “Chinese missteps are global missteps because of the world’s reserve currency’s renewed dysfunction”. Currently, the monetary restrictions are promporting the economy to react how it is suppose to, bearish.

That is just one piece of this puzzle, are US equities on the verge of something dire? China is still in question here, and it is believed that removing US economic uncertainty is one thing, but markets need to remove Chinese economic uncertainty if they are truly going to rally. We have seen a promising start in 2019 where US equities are up over 10% in less than two trading weeks.

The following few weeks will be the real test for the bulls that are helping prompt markets higher. However both the S&P 500 and Russell 2000 are at key levels at which CTA’s are “forced to cut their losses”. This will turn into a large systematic sell order. Another thing to note is that on a global market sentiment perspective, we have actually aligned with the peaks of November and December which brought a huge sell off. These levels have not even reached the threshold to “Greed” and are still hovering around “Fear”.

Sentiment readings from Nomura

Asian traders and investors alike are still bearish Asian markets, helping the global sentiment remain bearish.

To further analyze the expected US equity moves, we have to consider that this is the best start to the S&P 500 since 2003, greater than that of the short squeeze of 2009 and the best run oil has ever seen. We were in deep “Fear” just a week or two ago, and now were all happy go lucky. The movement is just suspect.

Markets are a mess to trade, its simple, everything bounces back like nothing ever happened. The recent FOMC comments were net 0 on the S&P 500 effect. Since the rate hike in December, markets have climbed back to a neutral level and oil has recovered significant losses. Not to say that these movements are worth worrying over, and panicking. It’s something to consider with great attention as no real news or events have come out to bring about such optimism which makes it a little more suspect.

One more piece that investors and other market participants should be aware of in 2019 is the debt redemption of companies listed on the S&P 500 is aggressively high for the next three years forecast. With the rise in interest rates, credit weakness may plague markets again as the Fed seems to be hesitant in stopping if their data tells them its the right move. Global profit forecasts have also been cut the most since 2009 and the trade war is becoming a ticking time bomb.

Weekly Economic Calendar

We’ve got a relatively quiet week ahead of us in economic news, there is very little high impact news that will come out of the US. Meaning the next week will be a price action and order flow based week. However, there are two very influential news events that are due to hit the wire one is a parliament vote for Brexit that is sure to resonate all the way to US equities. Other than the G20 meeting that takes place over two days, we may not see much movement in markets. The G20 meetings to have the power to sway markets depending on what is said during the meetings. 

Monday, no high impact news. 

Tuesday, PPI out of the US, ECB president Draghi goes on the wire and the Parliament Brexit Vote our of the UK. Watch equities and the pound alike. 

Wednesday, Governor Carney out of the UK goes on the wire, CPI data out of the UK as well. The G20 meeting begins. 

Thursday, the G20 meeting continues and BOJ Governor Kuroda goes on the wire. 

Friday, retail sales out of the UK and CPI data out of Canada. 

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