Equities Range Bound

In The Highstreet Group by John Bartoletta

The stock market indexes are poised for a down week, but remain in longer-term bull trends, in our opinion. At this time, it is not possible to say where the pullback will bottom, but the support levels are at around 17,600 and 17,000 on the Dow Industrials, and equivalent levels of 2040 and 1980 for the S&P. The closer levels are modest support levels, while the lower numbers are much more important to hold, and represent the line between a “dip” and a larger correction.

The market internals are not at oversold levels, so we suspect that those first support levels will likely break, and we could see the pullback extend to the 17,000 level on the DJIA, which would represent about a 7% pullback from the peak. We see the greatest pullback vulnerability in the financials and the larger old-line tech stocks, with both groups being in faltering trends for the past few months. If you are looking to decrease some market exposure and raise some cash for future buying, we believe those two sectors could be good areas to trim.

With that said, uncertainty about the Federal Reserve and potentially weak first-quarter GDP and earnings could send U.S. stocks 5 to 10 percent lower from current levels in the coming months. A 5 to 10 percent correction from here would be appropriate in our opinion. The three major U.S. indices have all jumped more than 10 percent in the last year.

We expect weakness in first-quarter corporate earnings numbers and U.S. GDP. Many major companies start reporting first-quarter results in early April, while GDP results are expected near the end of the month. Those factors, combined with confusion of when the Fed will move to normalize interest rates, could push stocks and U.S. Treasury yields lower as investors seek safe haven plays. We still maintain a long-term bullish outlook for U.S. stocks once the data and the Fed’s response to raising rates becomes clearer.

TRADING UPDATE: Geopolitical tensions are still a wildcard in any analysis. This may contribute to increased headline volatility that is difficult (if not impossible) to anticipate as to when it may occur with either fundamental or technical analysis. We put a short-side hedge on the NASDAQ early this week to protect for downside risk. We were cautious with the cash weighting and are only buying equities within sectors that we feel will respond well during this period. We remain cautious and will look for anything that could derail the current trend.