Is the Market Overpriced?

 Daily fundamental and technical analysis on S&Ps, crude and gold from Bill Baruch, President of Blue Line Futures.

E-mini S&P (March)

Yesterday’s close: Settled at 2638.25, up 6.25

Fundamentals: U.S benchmarks finished yesterday’s session on a strong note after battling another early wave of selling into the afternoon. Despite the wide ranges, the market is taking a minute to consolidate ahead of next week’s deluge of headlines. Furthermore, at these levels, U.S benchmarks are pricing in favorable news from U.S.-China trade talks, a Fed meeting that keeps a March hike off the table and wage growth from Nonfarm Payroll that dissipates a bit from the November read.

At the other end of the spectrum, earnings were expected to be soft at best and this has not been the case. The big banks have held their ground from last week and yesterday Comcast (CMCSA) was up 5.49%, Procter & Gamble (PG) +4.87%, United Technologies (UTX) +5.38% and Texas Instruments (TXN), +1.6% premarket have all lifted the broader market. All in all, after a sweeping wave of fear through December, the market has bounced back firmly. Still, the question remains, with next week in focus and as we head into the heart of earnings season, is the market overpriced in the near-term at these levels? We tend to believe so.

This morning, the earnings calendar has been mixed. To name a few; Bristol-Myers (BMY)  and Freeport-McMoRan (FCX) are trading sharply lower while Southwest Airlines (LUV) and American Airlines (AAL) have posted big gains along with Union Pacific (UNP).

The European Central Bank (ECB) comes into focus this morning after leaving policy unchanged in their statement as expected. However, it is ECB President Mario Draghi’s press conference set to begin at 7:30 am CT that is the main event. He’s likely to acknowledge the growth slowdown especially after Flash PMIs this morning missed. Traders need to look for any comments that keep a rate hike in the picture after the summer.

Technicals: Price action yesterday took out Tuesday’s low. There is a lot of support below the 50-day moving average that’s going to buoy this market in the near-term.

Crude Oil (March)

Yesterday’s close: Settled at $52.62, down 39¢

Fundamentals: We have pounded the table for nearly two months now that the biggest headwind for crude oil is growing U.S inventories. Yesterday, after the bell, the private API survey reported massive builds across the board in the tune of +6.55 million barrels, +3.6 million in gasoline, +2.57 million in distillates and +360,000 at Cushing. This brings today’s official EIA data directly to the spotlight. We maintain that crude oil cannot hold above $50 while inventories continue to build unless we see fresh OPEC jawboning. Even then, if inventories continue to grow in the manner that they have, OPEC’s jawboning will see diminishing returns.

Technicals: Price action made a lower low yesterday but failed to hold below first key support and settled all the way back to $52.62. The technical landscape continues to hold, however, our pivot from yesterday is now first key resistance; below there, the tape remains susceptible to immediate waves of selling. We have also added the March 50-day moving average as second key support at $51.40; since closing above this level on Jan. 16, it has not closed below here and this has kept buyers hungry.  

Gold (February)

Yesterday’s close: Settled at $1,284, up 60¢

Fundamentals: Gold is swinging this morning given the volatility in the dollar due to the ECB meeting and comments on U.S.-China trade. The ECB left policy unchanged and ECB President Mario Draghi hit on the weaker growth and their outlook moving to the downside. Adding to pressure in the euro was a whiff on Flash PMIs early this morning. Despite a sharp plunge, the euro has bounced back by the end of Draghi’s presser as he pointed to China’s slowdown not lasting long and as the committee did not deter from keeping a rate hike after this summer on the table. U.S weekly Initial Jobless Claims came in better than expected which added to downside pressures in the metal and better than expected Flash PMIs will likely weigh on the tape as the session unfolds. Still, we remain bullish gold and look to dips as buying opportunities.

The Morning Express is 1 of 4 daily reports that go to clients early each morning.