Stock Market Trapped by Lines on a Chart

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(Bloomberg) -- It's one of the bigger head-scratchers in markets. Companies are posting their biggest earnings gains in years and yet equities can't muster any upward momentum. That was evident on Thursday, with the S&P 500 Index falling for the third time this week, bringing its losses to 2.91 percent from last month’s high.

Stocks will eventually break out of their funk, as the fundamentals always win out in the long run. But in the meantime, trading patterns rule, and on that basis it's become evident that stocks are stuck in a trap —  a bear trap, to be more precise. According to the equity strategists at Bloomberg Intelligence, a lack of buying power has left the S&P 500 stuck in an "ominous descending triangle formation" below its 50-day moving average but above its 200-day one. This means, in the short term, since the S&P 500 broke below its late-April low of about 2,634, then it's likely to continue falling at an accelerating pace, perhaps to below 2,600. A break beneath that would reignite downside risk, with the next key support level near 2,500, which was last seen in September.

Of course, many investors give as much credence to technical analysis as they do to voodoo. But that's not to say there isn't plenty for them to worry about. Although earnings-per-share estimates for the year have crept higher, that's only because of the better-than-expected first-quarter results. "The outlook for limited top-line expansion amid inflationary pressures, and rapid deceleration in 2019 EPS growth, may hang over the market," BI strategists Gina Martin Adams and Kevin Kelley wrote in a research note on Thursday. "These concerns may need to be alleviated before stocks can power out of their malaise."

EUROPE TO THE (BOND) RESCUE

The U.S. bond market, by virtue of its position as the world's biggest, rightly garners most of the attention and commentary. But if the recent selloff proves short-lived and bonds start recovering, investors may have Europe to thank. Euro zone bonds soared Thursday after Eurostat in Luxembourg said consumer-price growth unexpectedly weakened to 1.2 percent last month and the core rate, excluding volatile items such as food, was the lowest in more than a year at just 0.7 percent. Both measures were below most economists’ estimates. Yields on German 10-year bonds fell 5 basis points to 0.532 percent, the biggest drop since March. In fact, yields on all major euro zone government bonds dropped, and all are trading below their three-month average, data compiled by Bloomberg show. The rally even ignited demand for U.S. bonds, with 10-year Treasury yields falling 2 basis points to 2.95 percent. Given how connected the global economy has become, many investors find it hard to believe that low inflation — and sluggish growth — in a large part of the world such as the euro zone won't influence inflation rates in another, such as the U.S. "Europe missed the memo about rising global inflation," Jim Vogel, an interest-rate strategist at FTN Financial, wrote in a research note. "This might not be a major long-term development, but it's still a surprise in the wrong direction versus the Fed's grand view that prices have broken upward."

DOLLAR SUFFERS RELAPSE

It felt a bit like 2017 in the foreign-exchange market on Thursday. That's to say the dollar tumbled despite some pretty good economic news out of the U.S., the euro rallied even though the inflation data out of Europe was soft and emerging-market currencies jumped. Those moves, which were commonplace last year, had all but disappeared in recent weeks as the dollar rallied amid a pretty severe short squeeze as traders unwound some of their lucrative bearish bets. The Bloomberg Dollar Index fell as much as 0.46 percent, its biggest decline in six weeks. Few traders want to be long the dollar and betting that it can continue to rally heading into the important monthly jobs report on Friday because the risk is skewed toward disappointment. The employment portions of the Institute for Supply Management's monthly manufacturing and nonmanufacturing indexes this week both showed a drop in April from March. Cornerstone Macro head of technical analysis Carter Worth wrote in a research note that the time is right to “fade" the dollar's rally, having previously predicted a strengthening, according to Bloomberg News's Arie Shapira. On Feb. 5, when the ICE U.S. Dollar Index closed around 89.6, Worth said that an index of about 91 was “a very reasonable price objective.” The index touched 92.8 on Wednesday, its highest since December.

CRY FOR ARGENTINA

The country's peso dropped to a record low as concern grew that the central bank’s decision to reduce the pace of intervention in the foreign-exchange market will pave the way for further declines in the currency. After spending almost 10 percent of its reserves this year to stem the peso’s decline, the central bank raised its key interest rate to 30.25 percent at a surprise meeting last Friday, citing higher-than-expected inflation. Concern about the central bank’s inability to manage inflation and the government’s inability to narrow its fiscal deficit is spreading, according to Bloomberg News's Ignacio Olivera Doll and Andres R. Martinez. Telecom Argentina SA, the nation’s largest telecommunications company, postponed a $1 billion bond sale because of the market volatility. Recall that Argentina earned plaudits last year when it sold $2.75 billion in 100-year bonds, a sign that Mauricio Macri’s administration had ushered in a new phase of financial dependability. Those bonds now trade at 87.445 cents on the dollar as investors question the central bank’s credibility and global emerging-market assets slide, according to Bloomberg News's Aline Oyameda and Ben Bartenstein. "Argentina, despite some significant reforms, is still left with a massive fiscal deficit and large imbalances in its external account," said Delphine Arrighi, a money manager at Old Mutual in London.

TRADE TIFF FALLOUT

China has yet to impose tariffs on imports of U.S. soybeans, but the country’s traders are already canceling American shipments, according to the latest trade data. Weekly numbers numbers released Thursday by the U.S. Department of Agriculture show China canceled import commitments in the week ended April 26, Bloomberg News reports. Total commitments for the so-called crop marketing year that started in September now stand at 28.7 million metric tons, 133,700 tons lower than a week earlier.The total has fallen for three consecutive weeks, the first time that’s happened since 2015. The data reinforce comments from the chief executive officer of grain-trading giant Bunge Ltd., who said on Wednesday that China has essentially stopped buying U.S. supplies. “Whatever they’re buying is non-U.S.,” Soren Schroder told Bloomberg News. “They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.” China last month announced planned tariffs on U.S. shipments of soybeans. A U.S. team led by Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross landed Thursday morning in Beijing and were scheduled to meet Chinese officials in the afternoon and for dinner, the State Department said.

TEA LEAVES

By all measures, the monthly U.S. jobs report to be released Friday will reinforce the notion of a strong labor market. The median estimate among economists surveyed by Bloomberg News is that the economy added 193,000 jobs last month, up from 103,000 and in line with the average over the past five years. As such, the report is unlikely to sway the outlook for monetary policy. But that doesn't mean there isn't the potential for plenty of action in the markets. The top-ranked rates strategist at BMO Capital polled their clients and found that 58 percent said they would step in and buy if the bond market were to sell off on the report, the highest such percentage in years. That would suggest that the bond market may not be in such terrible shape despite benchmark Treasury 10-year yields rising to 3 percent and generating losses for investors so far this year.

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