The first quarter of 2019 was a smash hit for bulls. Capitulating central banks, record buybacks flushing the system with artificial liquidity, constant jawboning by dovish central bankers and permanent promises of progress on a China trade deal, and a collapsing yield picture bringing back TINA (there is no alternative) all of which produced a relentless 3 month move higher back in equities that rendered any fundamental issues of slowing growth, earnings and even a yield curve inversion irrelevant and erased the losses of a disastrous Q4 of 2018.
Liquidity and central banks rule, nothing else matters. Optimism is back and hope is pervasive that 2019 will replay the earnings recession case of 2016 meaning that all bad news is priced in, any slowdown will be temporary and markets will resume their 10 year bull trend with new highs to come.
Yet, bulls have not proven their case. So far lower highs on all key indices risking major potential topping patterns and hence the upcoming earnings season may serve as a key pivot for markets in the weeks ahead. Dovish central banks have been fully priced in by markets and the liquidity of buybacks will at least temporarily disappear during the buyback blackout window.
Favoring bulls in April is, generally speaking, positive seasonality especially in the early part of the month, but Q1 earnings reports will also serve as a key test of how significant the global slowdown is and how pervasive any spillover may bleed into the next few quarters. As earnings estimates have come down significantly during Q1, companies may even surprise to the upside, but it is the revisions to their outlooks that may serve as a key decision node for investors who have priced in little risk into equities other than a few select sectors.
A China deal and even perhaps a miracle relief on Brexit continue to serve as potential upside triggers to outlooks keeping many sellers on the sidelines as many are expecting a further pop in equities especially if a positive China deal were to come to fruition.
Bears have managed to keep price below the January 2018 highs as well as the long term 2009 trend line, but are also running out of time as a confirmed break above the January 2018 highs could set markets on a path to at least retest the highs or make new highs.
Hence the time period in April into May sets up for decision time for markets.
Risk to markets: The rally off of the December lows remains untested and uncorrected with plenty of open gaps below while indices have formed specific patterns that could be interpreted as bearish. Indeed the rally has been so steep that it will require ever higher prices to avoid a confirmed break of these patterns. Due to the vertical nature of this rally these patterns are at risk of breaking to the downside if markets were to experience just a few days of downside. As these patterns are very large sizable downside and an increase in volatility could emerge on a confirmed break of these patterns.
Timing matters as structurally bulls have not been able to confirm a resumption of the larger bull trend hence April may be a key month and bulls can hardly afford a down month.
I’m discussing technicals and select key charts in the video below:
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Author: Tyler Durden