Major Moves

Trading was aimless during today's session as economic and earnings data came in below expectations. While there was plenty of bad news, some of the media's hand-wringing was a great example of post-hoc rationalization. This was particularly true in the energy sector.

Each Wednesday, the Energy Information Administration (EIA) releases a report of oil inventories held by commercial firms in the U.S. Like most weekly reports, the data can be very "noisy," with wide swings from week to week. In a bullish oil market, we would like to see inventories fall because purchases and shipping are picking up.

The weekly oil inventory report swung back hard today to show an increase of 7.1 million barrels versus a decrease of 8.6 million barrels last week. When the two data points are added together, we see a small net decrease over the past two weeks that is more likely to be an accurate reflection of the market. Most traders expected today's news after inventories were reported shockingly low last week. It is normal to see a reversion back to the mean and should not be cause for alarm.

As you can see in the following chart, oil is down again today, but it is still flat since breaking out of an inverted head and shoulders pattern on Feb. 15. Reading the headlines might lead you to believe that the oil inventory report is the proximate cause of today's decline, but from a technical perspective, I think that assumption is unjustified.

Performance of the United States Oil Fund
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S&P 500

Regardless of the "reason" for oil's decline today, the decline didn't do anything to help the S&P 500 break its own level of resistance. The market declined again today after being rejected at short-term resistance in the 2,800 range. I still expect this to be a short-term correction, but there are some issues that could contribute to additional selling this week.

The U.S. trade balance numbers were released today with a greater deficit than at any point in the past 10 years. Trade data lags other related economic releases, so the numbers weren't a surprise. However, because the U.S./China trade deal is continuing to act as a source of uncertainty, news like this is likely to set traders a little on edge.

There are reports that President Trump is pressuring his trade negotiators to complete a deal with China in order to relieve some of that pressure on the markets. That may be a good thing, but it could still be a week or two at best before details are available.

My biggest concern for the market's performance this week remains the labor report from the Bureau of Labor Statistics (BLS) on Friday. ADP, a private payroll and employment management company, reported its own version of the BLS report this morning and missed expectations by a small margin. The ADP and BLS reports are different enough that I wouldn't suggest that this guarantees as big a miss on Friday, but it is very likely to be a disappointment as the data swings lower after huge positive surprises over the past two months.

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Performance of the S&P 500 Index

Risk Indicators – Troubled European Banks

From a risk perspective, I believe that a strong dollar remains the greatest source of uncertainty facing the market. Its strength is one of the reasons the trade balance was so negative over the past few months, and it will likely drag on earnings data in the first quarter.

As I mentioned in prior Chart Advisor issues, the problems with a strong dollar are not exclusively due to the Fed's interest rate policy. The other side of the dollar's value is the value of the currencies it is being compared to. The dollar index is the dollar's value compared to a trade-weighted basket of other major currencies. More than half of that basket is the euro, British pound and Japanese yen. Therefore, even if investors are neutral on the dollar, if they are very bearish about the euro and pound, the dollar will rise as its counterparts fall.

Bloomberg reported today that the European Central Bank (ECB) will be cutting its growth forecast in an announcement on Thursday morning such that it will be low enough to justify a new round of long-term loans to the big banks in Europe. On the one hand, that is good because European banks are still under significant financial stress following the 2008 financial crisis and Greek debt crisis in 2011-2013. On the other hand, this is a sign that European growth is in decline.

As a risk indicator, I will be looking for any signs of strength (or worsening weakness) in the big European financial institutions. I think Deutsche Bank AG (DB) would serve this purpose well because its intrinsic financial stability is so poor and therefore should be very sensitive to subtle changes in trader sentiment. As you can see in the following chart, Deutsche Bank stock is stuck at resistance and has just started to turn lower. If the stock reverses and breaks resistance, that would be a "risk-on" signal for the market. Any additional losses will instead eat away further at investor confidence and should be treated as a signal for caution.

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Performance of Deutsche Bank AG (DB)

Bottom Line: Brexit and Labor Could Set the Tone

As I mentioned in Monday's Chart Advisor newsletter, the labor report on Friday is probably the biggest news we will see this week and should set the tone for the month of March. In addition to Friday's report, the latest round of Brexit negotiations with the EU will be over by Sunday night in order to give the U.K. parliament time to vote on the measure on Tuesday.

The Tuesday Brexit vote has a good chance of failing, which would then require members to vote on a "no deal" version or "hard" Brexit on Wednesday. There are a lot of variables at play related to next week's Brexit votes that could worsen the economic outlook for the U.K. and EU, adding further strengthening the dollar. While I remain cautiously biased to the upside in the short term, Brexit and labor will probably keep the major stock indexes flat or negative over the next few trading sessions.

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