Major Moves 

Stock traders made a valiant effort to keep prices above breakeven today, and they succeeded by a narrow margin. Worries about trade, housing, and the near-term outlook pulled the rug out from under the earlier price rallies. The silver lining is that many European traders were off for the day, which may have removed some support for bulls.

One group that I have been watching lately got some more bad news today that I believe applies to the outlook for the rest of the market. The apparel maker PVH Corp. (PVH) dropped more than 14% as investors digested a weak earnings report. PVH's issues weren't just about the company’s performance. Some problems are likely systemic.

In the report, PVH's management estimates that a rising dollar will remove $0.10 per share from annual earnings. That may not sound like a lot when total earnings per share are still expected to be more than $10, and that is how management attempted to spin the news.

However, what investors care about is not what your earnings are, but where they are going. The rate of growth in earnings is what drives demand for stock shares. Ultimately, profit growth is what drives cash flow, dividends, buybacks, and expansion. When evaluated from that perspective, the $0.10 per share represents about 12% of expected growth, which is a big problem for shareholders.

I have found retail apparel stocks to be a good group to watch when I am concerned about macro issues like a rising dollar, trade disputes, or weak consumer spending. PVH's weakness is similar to many other stocks in the group. For example, despite its own stellar earnings report, Hanesbrands Inc. (HBI) has been declining since May 2 and recently completed a large double top reversal pattern.

The same method I used in yesterday's Chart Advisor to make a downside projection using Fibonacci retracements can be applied to Hanesbrands' double top as well. In this case, the stock reached the initial downside target today and could easily continue all the way to the traditional target for a double top near $14.31 per share.

Although not a perfect indicator, the retail apparel group has been a useful way to predict general short-term weakness in the market. I have found the opposite also to be true – if apparel stocks start to find a bottom in the short-term, that could be used as evidence that the bearish market is running out of steam.

Chart showing the share price performance of Hanesbrands Inc. (HBI)

S&P 500

The S&P 500 continued its breakout from the head and shoulders pattern I have already highlighted. As I mentioned in prior issues, the head and shoulders pattern is well known but has a very poor track record for signaling large drops in the stock market.

This sounds counterintuitive, but failed head and shoulders patterns (crossing back above the neckline without a major decline) have historically produced outsized bullish returns. There is no evidence yet that this head and shoulders pattern will fail; however, prior history makes me cautious about aggressive estimates to the downside.

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Performance of the S&P 500 Index

Risk Indicators – Waiting for Early Bullish Signs

The stochastics oscillator was developed by the technician George Lane in the 1950s and is one of my favorites for identifying periods of oversold or overbought market conditions. Lane recommended the oscillator as a tool for identifying short-term bullish and bearish divergences.

A divergence occurs when the price of an asset is forming higher highs or lower lows while the stochastics oscillator is forming lower highs when it is in an "overbought" condition or rising lows when it is in an "oversold" condition. A cross of the indicator's signal line following the second peak or trough can be used to trigger a new trade.

I wanted to point this out because, while most short-term risk indicators still look weak, high-yield bond ETFs are forming a small bullish divergence on the stochastics indicator. While this isn't enough to take action, it is a positive sign worth watching. In my experience, high-yield bonds often lead stock market rallies or declines by a few days. If the divergence completes, it could be a good opportunity to watch the market more closely for short-term bullish opportunities.

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Performance of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Bottom Line – More Data Coming Next Week

At this point, I don't expect very much else to change investor sentiment this week as investors wait for new information to justify the next round of buying or selling. The release schedule for economic reports is busy next week, starting with manufacturing data on Monday and ending with the May labor report on Friday. These data points could be a catalyst for a shift one direction or the other in the market, assuming there aren't any big surprise changes in the status of the U.S./China trade war.

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