The market should be tumbling. After Thursday’s close, Broadcom (AVGO) released earnings and guidance that were so bad they sunk the entire chip sector—the iShares PHLX Semiconductor ETF (SOXX) has dropped 2.6%—and confirmed that the trade war continues to take a toll. China’s industrial production, meanwhile, grew at its slowest pace in 17 years, and tensions between the U.S. and Iran continue to heat up. With such a litany of bad news, I can easily imagine the market dropping far more than it has.
But wait—the market should also be heading higher. U.S. retail sales, which looked so disastrous last April, rose in May, while April’s number was revised up from a drop of 0.2% to a rise of 0.3%. The Michigan Consumer Sentiment index itself was a disappointment—it fell to 97.9, below forecasts for a reading of 99—but its inflation component was so low that it adds to the list of things that could cause the Federal Reserve to cut interest rates.
So why is the market running in place? Because too much is happening over the next two weeks to make betting one way or the other an obvious play. The Fed, for one, is set to meet next week and could decide to cut interest rates or sit tight. What it does, as well as how it communicates that decision, could go a long way toward determining which direction stocks go.
After the Fed, all attention will turn to the G-20 meeting in Japan on June 28 and 29. President Donald Trump and Chinese President Xi Jinping will probably discuss the future of trade between their two countries. But will they walk away with an agreement, a wider gap between them, or something in between? Flip a coin.
As a result, the S&P 500 is almost literally going nowhere.
See that little sideways pattern sticking out of that almost vertical line? That’s called a flag, writes Instinet’s Frank Cappelleri, and technical analysts view it as a bullish pattern for the market. That pattern has formed near 2900, a level of resistance for the S&P 500, and that, too, might be bullish. “This is exactly how major resistance points can be overtaken,” Cappelleri writes. “Respect support, see an upside follow through, form bullish patterns, achieve bullish pattern targets… repeat, repeat…”
But we suspect that the Fed and the G-20 will determine whether the S&P 500 can follow through on that bullish pattern—or, like a deer in the headlights, can’t get out of the way of what it sees coming.
Write to Ben Levisohn at Ben.Levisohn@barrons.com