foxex: Seeking New Highs

Chart Advisor | Focus on the Price

Tuesday, July 16, 2019

1. A Long Way to Go for U.S.-China Trade

2. VIX Shows Few Concerns

3. British Pound Breaks Down to New Lows

Market Moves

Stocks were moderately pressured on Tuesday after President Trump said at a Cabinet meeting that a U.S.-China trade deal still had "a long way to go." Despite this bit of a stumble, though, price action on the major indexes continues showing solid support, and the overall path of least resistance appears to remain to the upside.

Yes, major large-cap indexes are in uncharted territory at or near brand new record highs. But that hasn't stopped markets from rising even further in the past. This is especially the case now, as the Fed's rather clear path to lower interest rates should continue to put a floor under surging equity markets.

This path was touched upon again by Fed Chair Jerome Powell on Tuesday when he reiterated in a speech the Fed's view that uncertainties surrounding global economic growth and trade strengthen the case for lower interest rates. And Chicago Fed President Charles Evans said on CNBC Tuesday that economic uncertainty and lagging inflation likely create the need for "a couple of rate cuts" by year end. He also added that two rate cuts may not be sufficient.

On the earnings front, the big banks – J.P. Morgan Chase (JPM), Goldman Sachs (GS), and Wells Fargo (WFC) – all beat expectations. JPM and GS closed Tuesday positive, while WFC fell nearly 3% on a worse-than-expected outlook. On tap for Wednesday are Bank of America (BAC), Netflix (NFLX), International Business Machines (IBM), eBay (EBAY), and others.

While earnings season has just started and we need to see more results before identifying any developing trends in earnings, the S&P 500 remains solidly bullish. As shown on the chart, we could stand another pullback to around the 2,960 level without breaking the integrity of the uptrend. Any rebound above that level could likely result in new record highs towards the first major target in uncharted territory – the 3,090 level, which is a key 161.8% Fibonacci extension level. Any breakdown below 2,960, would invalidate this target.

VIX Shows Few Concerns

Though the major stock indexes dropped on Tuesday, the VIX is showing very little in the way of any concerns on the part of investors. The VIX (or CBOE Volatility Index), also known as the "Fear Gauge," represents short-term volatility in S&P 500 index options. Indirectly, it measures investors' fears and concerns about the market overall.

Currently, as of Tuesday's market close, the VIX is below 12.9, not far above the most recent extreme low of 11 from back in mid-April.

Perhaps more telling than the raw VIX number, however, are certain moving averages that we use to extract more meaningful context from the index. On the chart above, we've plotted both the 50-day and 200-day moving averages of the VIX. As their names suggest, these moving averages provide a running average of the VIX level for the past 50 or 200 days.

The VIX is now way below both its 50-day average (just below 16) and its 200-day average (just above 17). Clearly, there's not a lot that investors as a whole are really worried about. That said, the VIX is generally mean-reverting, which means that higher volatility often follows closely after low volatility extremes. For now, though, investor fear is not a barrier to higher stock prices.

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British Pound Breaks Down to New Lows

The British pound hit a new long-term low around the 1.2400 handle against the U.S. dollar. Such an extreme has not been seen since April 2017. Much of the down-move on Tuesday was due to a rise in the U.S. dollar, which was helped along by better-than-expected U.S. retail sales data Tuesday morning. Longer term, however, the British pound continues to be heavily pressured by ongoing fears of a "no-deal" or "hard" Brexit.

As shown on the chart, GBP/USD (British pound vs. U.S. dollar) dropped below the early January low to establish a new 2+ year low. Though this technical breakdown is currently just tentative and not yet confirmed, any confirmation of the bearish break could mean further losses for the currency pair. With any continued follow-through on the breakdown, the next major downside target is around the 1.2100 support level.

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The Bottom Line

As the new earnings season begins to ramp up, equity markets remain in a strong position. We could see a further pullback, especially on any other trade setbacks between the U.S. and China. However, stocks appear to be well-supported, and investors are showing little in the way of fear or concern. As long as earnings results overall don't turn too far south, we could very well be seeing progressively higher record highs on the horizon.

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