It looks like the seasonal rally in US stocks may be coming to an end in May as often happens. There’s a reason for the old market saying “Sell in May and go away”. Not only do US stocks look technically exhausted from months of the Trump honeymoon rally, but there are a number of fundamental developments this week that could be game changers.

Technicals:

Historically, stock markets have tended to post strong performance between mid-October and mid-May and weaker/volatile performance between Mid-May and Mid-October. As we head toward the seasonally weaker time of the year, signs of slowing upward momentum have been emerging for a while.

The seasonal Dow rally peaked on March 1st about the same time as tax saving deadlines. Since then, the index has been trending sideways to lower, working off overbought RSI conditions. It has been unable to retake an uptrend like it broke in March, a sign of potential technical trouble.  

Recently, the Dow tried to mount another move upward. Although it was able to retake its 50-day average, it was unable to break its previous high near 21,130, completing a bearish double top and has since drifted back under the 21,000 round number. Meanwhile RSI peaking at a much lower high indicates the Trump election honeymoon is over and a correction or downturn pending.

In a potential pullback, initial support may appear near 20,720 the 50-day average, the recent low near 20,395 or 20,270 a 23% Fibonacci retracement of the post-election rally.

Fundamentals:

There are a number of developments on the fundamental side this week that could impact market sentiment.

First, it’s another big week for US corporate earnings but we are starting to pass the peak for market impact. Except for Apple, Facebook, Merck, Pfizer and Tesla, the focus now turns to small and mid-caps and the potential for a single result to impact the overall market decreases from here.

Second it’s a big week for economic news, headlined by US ADP and nonfarm payrolls. Last week’s US GDP indicates a slowing US economy. Last month, nonfarm payrolls were below 100K and way below expectations. A second poor month could create a lot of questions about whether the current economic cycle has peaked and dampen the outlook for the US economy and corporate earnings going forward.

Third, it’s potentially a big week for political news. Congress is expected to vote on a spending bill to keep the US government running through the end of September. The deal reached over the weekend which does not fund a border wall, only gives President Trump half the military money he asked for and keeps funding Democrat priorities can be seen as a loss for the new administration. Meanwhile rumours of a House vote on health care reform continue to come and go. It’s been a lot harder for President Trump to get anything done than traders had expected or priced in earlier this year and it remains to be seen how long this divergence can last before the market  runs out of patience.

The US budget deal serves only to postpone the big showdown over spending and a potential government shutdown to the fall. Because of this, a Fed rate hike looks unlikely in September, which I why I think FOMC members have been calling for three hikes this year rather than four. The Fed meets this week with a decision and statement due on Wednesday afternoon.

This time around the central bank finds itself stuck between a rock and a hard place. Traders will likely look to the statement for hints as to whether a June hike is still on the table. The US economy has been slowing as shown by the soft GDP and construction spending, while inflation has been rising.  Meanwhile, with September looking off the table the pressure is firmly on the central bank to raise rates in June to keep on its course. Any hint of no hike in June could be seen as a dovish turn. This could spark a short term liquidity rally but also raise questions about the health of the fundamental drivers behind the market.  

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