Week Ahead: Bullish Stocks Likely To Slow, Oil To Rise, Euro To Fall

We've been speculating that this strong earnings season would help buoy indices to new records. But while prices did indeed rise to finish the week—both the Dow Jones Industrial Average and Russell 2000 were up 0.43% on Friday while the S&P 500 gained 0.33% and the NASDAQ Composite eked out a 0.13% boost on the heels of a volatile week—we're concerned that the inability of major indices to achieve new records during this robust earnings season may be a red flag.

If healthy corporate results, on top of an expanding economy and market uptrend, failed to push markets to new records, what do investors have left to hold on to now that earnings season is waning?

Though most stocks advanced after a tumultuous week, geopolitics are returning to the forefront and will almost certainly become the central focus of investors, testing bullish sentiment. The Turkish economic crisis threatening to spread to global markets offset renewed trade negotiations between China and the US and positive earnings, and stocks swung between gains and losses according to what was in the spotlight from moment to moment.

Now All About The Economy

While the market may enjoy an additional boost as it makes history by becoming the longest-running bull market since WWII, unless the trade talks reach a decisive and somehow positive climax, we might see stocks retest the uptrend this late in the business cycle. Which means, in a nutshell, it’s all down to the economy’s continued growth.

The S&P 500 Index advanced 0.59 percent for the week, bouncing off a 1.09 decline. This resumes the rally that was interrupted by last week's setback, bringing it to its sixth week. Technically, the week's trading failed to overcome the preceding, August 7 peak of 2,863.43, opening the possibility of an H&S top reversal, should prices cross below the neckline, the line connecting the lows since late July.

The Dow Jones Industrial Average rose 1.41 percent on the week, after it surged 429 points on Thursday, the biggest jump for the mega cap index since April 10, amid renewed trade talks and gains in Walmart (NYSE:WMT), Caterpillar (NYSE:CAT), Boeing (NYSE:BA) and Cisco Systems (NASDAQ:CSCO). Technically, the Dow posted a new peak above the preceding 25,692.72 registered on August 7, the highest since the February 26, 25,732.80.

This new peak resumes the uptrend since the April low. Considering the firms listed on the Dow are the most sensitive to the downside of trade hostilities, this uptrend confirmation is a positive sign over the midterm, the next weeks. Still, we remain concerned regarding the longer-term, the upcoming months.

Among the other major US indices, for the week, the NASDAQ Composite underperformed, falling 0.29 percent after Chinese tech giant Tencent (OTC:TCEHY) fell 6.7 percent upon missing earnings estimates when it reported on Wednesday. Technically, the weekly decline follows the preceding week's shooting star, which in turn confirmed the selling pressure of the evening star pattern developed during the three weeks from July 9 through July 27.

The Russell 2000 advanced 0.36 percent for the week and 1.78 percent cumulatively for the third straight week. Technically, the bounce off the week’s lows formed a hanging man which is bearish when confirmed with a lower close for the following week. While the small-cap index finished Friday’s session at 1692.95, the closest its been to the record close it registered on June 16 at 1,696.81, the index has also been under consistent pressure under the 1,700 level since the weekly high wave candle formed on June 18.

Corporate Growth To Peak In 2018?

Though the trade war and Turkish crisis have reclaimed center stage, traders may still be hoping these are temporary setbacks. Some may even be regarding the trade tussle as nothing more than a series of negotiation strategies, whose risks would evaporate with a signed deal.

Turkey's troubles are reminiscent of the 1997 Asian financial crisis or the 2011 eurozone debt crisis. However, Turkey's relatively small GDP ($857.7 billion USD in 2016 vs Germany's $3.467 trillion and the US's $18.57 trillion for the same year), makes these comparisons—and the related fear they might fuel—fundamentally unwarranted.

Perhaps more significant, the US's economy remains healthy with a 10 percent rise in sales growth, the strongest since the third quarter of 2011. Cost cutting compounded earnings. However, the rebound in sales growth reflects a more robust economic foundation, including improving consumer and business demand.

It’s our view that US GDP expansion will moderate from last quarter’s 4 percent, while the country's economy maintains a more tempered pace of growth. As such, we expect corporate profits to rise again next year, but the rate of advancement will, in our view, peak in 2018. We think the bull market will extend into next year, but slower earnings growth suggests stock market gains may be more moderate in the final stages of the expansion.

Week Ahead

All times listed are EDT

Monday

2:00: Germany – PPI (July): expected to rise to 0.4% from 0.3% MoM.

Wednesday

8:00: US – Existing Home Sales (July): forecast to increase 0.8 percent from a -0.6 percent a month earlier.

10:30: US – EIA Crude Inventories (w/e 17 August): expected to see stockpiles of 2.719M.

Technically, WTI crude oil found the support of the uptrend line since mid-November. This means even after the sharp, 14% drop since the $75 peak of early July—which only extended the uptrend—the commodity still remains within an uptrend.

14:00 US – FOMC Minutes: no change at the latest meeting means these minutes may not provide too much in the way of new information but given the rally in the dollar over the past month, the minutes will need to strike a hawkish tone to avoid provoking a possible sell-off in the greenback.

20:30: Japan – Manufacturing PMI (August, flash): forecast to rise to 52.4 from 52.3.

Thursday

3:00 – 4:00: France, Germany, Eurozone – Manufacturing and Services PMI (August, flash): German manufacturing PMI to fall to 56.6 from 56.9, while eurozone manufacturing PMI to remain steady at 55.1.

Although the euro advanced and formed a hammer, it already fell below the November support and May’s trough at the 1.1600 area. This suggests that the hammer is merely an upward correction within a downward trend.

7:30: Eurozone – ECB Meeting Minutes: these could provide some support to a flagging euro if they reinforce the image of a bank moving towards tightening policy in the longer term.

8:30: US – Initial Jobless Claims (w/e 18 August): claims expected to rise to 215K from 212K.

9:45: US – Manufacturing and Services PMI (August, flash): manufacturing PMI to fall to 55.1 from 55.3, while services PMI to fall to 55.9 from 56.

10:00: US – New Home Sales (July): forecast to rise 2.5% MoM from -5.3%.

10:00: Eurozone – Consumer Confidence (August, flash): forecast to fall to -0.7 from -0.6.

19:30: Japan – CPI (July): expected to be -0.2% MoM and 0.4% YoY from 0.1% and 0.7% respectively. Core CPI to rise to 0.9% from 0.8% YoY.

Friday

8:30: US – Durable Goods Orders (July): forecast to fall to -0.3% MoM from 0.8%.