Topline U.S. growth is lackluster: 4Q15 GDP grew 1.4% and the initial 1Q16 report was .5%. The combination of a strong dollar and weak international economies have led to declining corporate profits in 4 of the last 5 quarters. The combination of weak economic and revenue growth is the primary reason equity markets have been unable to break through long-term resistance. Unfortunately, it appears the markets are on track to once again fail an upside test.

This week the BEA reported:

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.5 percent in the first quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent.

The report contained the following table:

Personal consumption expenditures are decelerating; they grew 3.6% in 2Q15, but only 1.9% in 1Q16.  For the first time in 4 quarters, durable goods purchased contracted (-1.6%) while spending on non-durable goods was weak (+1%). Overall capital investment contracted .7% in 3Q15, increasing to -3.5% in 1Q16.  CRE and IP investment dropped the last three quarters while investment in equipment declined the last two.  And exports contracted 2.6% in 1Q16. The above report contains only three positives: the consumer is still spending (albeit weakly), residential investment is gaining ground, and local government spending ticked up 2.6%. Aside from those points, the report contains little to cheer about.  This is the type of environment companies struggle in.

And the latest earnings data bears that out.  This week Zack’s noted:

Total earnings for the 209 S&P 500 members that have reported results are down -5.5% from the same period last year on -1.6% lower revenues, with 75.6% beating EPS estimates and 56% coming ahead of top-line expectations. The side-by-side charts below compare the results thus far with what we have seen from the same group of 209 S&P 500 members in other recent periods 

The report’s only positive was a note that earnings were beating lowered estimates – hardly an endorsement of the current environment.

And last week’s price action shows the markets are less positive:

The week before last, the SPYs were again approaching the 210-212 price level.  But last week the market retreated from this level, with prices closing below the 20 day EMA. 

The QQQs never approached their previous highs, instead reaching the 111 level. But last week prices retreated. And this index closed below the 200day EMA.

It’s possible the transports formed a double top at the 145 area.  Note the weaker volume on the second peak and declining MACD.

And on Friday, the IWMs broke their two-week uptrend.  

Last week’s retreat will come as no surprise to regular readers; I’ve been sanguine about the latest rally since it started.  But I would also caution that I don’t see a major sell-off either.  The economy is still growing.  And one can argue that there are enough earnings positives to prevent a massive drop.