Focus to shift to Q4 earnings

US equities continued their relief rally on hopes of a trade deal and more dovish Fed, which was confirmed by the FOMC minutes last night. Risk assets rose across the board, while VIX moved back below 20.

US indices rose about 10% in less than 10 trading days, which for rather looks like typical bear market bounce, rather than a sustainable bull trend. As a reminder, the 2008 sell-off saw the S&P 500 surge 15%, 9.5% and 27% during the course of its downward move. Clearly the market was oversold with record redemption since 2008 over the course of last month and a bounce was due, but the real test for the bulls is now, with US indices nearing key resistance levels which will represent important psychological hurdle.

The next level eye on the SP500 is at 2630: this is the 50% retracement level of the entire downmove from the September top to the December bottom (half way back). It is also the level on which the SP500 bounced twice in October and November before entering into bear territory in December. A breach above would pave the way for 2710 (the 61.8% retracement level) and then 2815 which is the Oct-Nov peak. Technically in my view , the primary trend remains to the downside as long as 2815 holds. Market breadth and relative strength analysis also remain in negative territory at this point.

Eyes will soon turn to Q4 earnings with the banking shares to debut publishing next week. Q4 EPS expectations were revised down 4.5% since September, but downward revisions roughly in line with history. 2019 earnings were also revised down by 2.8% for the whole year , but this seems rather low considering tighter money, waning tax reform benefit, trade war impact and much lower oil price.

In a fragile market, weak results are likely to be punished, and good results could bring further relief that the cycle is not over. Usually when equities enter in a bear mkt (20%+ correction) it takes time to restore confidence. A bear market lasted 13 months on average, and it took 22 month to recoup the losses. My take is that rebounds following results will be used to take profit or reduce exposure further, and we could see a typical ABC corrective pattern. We are now potentially completing wave B (bounce) and the C wave has yet to come (a move than typically spans to a lower low than wave A).

Economic calendar today:

• US New Home Sales – as a reminder home sales peaked in November 2017 and since then has been going down.
• Weekly jobless claims – has still been supportive at low levels
• Fed members speeches including Powell, Bullard and Clarida

Dollar: The dollar could continue to weaken on the back of more dovish fed speeches and overall risk appetite. EURUSD breached the 1.15 resistance and will now aim for 1.1620, then potentially 1.18. On the other hand there is not much positive catalyst for the Euro either. It is hard to imagine the ECB getting more hawkish on the face of notably slowing growth, political woes and after it just abandoned its QE. One might rather look to sell on EURUSD strength, especially if markets start turning risk-off again.