Archives for June 2019

Trump Lays Down As Expected

The G20 meeting in Japan is now behind us. Trump met with Xi and that’s no longer an uncertainty for the markets although you would have to be a fool to believe that something positive wasn’t going to come out of that meeting. That has been the president’s m.o. since he took office. He creates a spike in negativity and tough guy persona wit heels fully dug in to appease his base. Then he emerges as some victor or great person of compromise without really getting anything in return.

Last Friday, I wrote one of my more enjoyable posts in a while. You can view it HERE. I can’t articulate why it was so enjoyable other than to say that there was lots of info to share. In it I offered, “I really would be surprised if Trump doesn’t basically lay down and meet some of Xi’s demands before talks can be restarted.” That’s exactly what happened. Trump gave back exactly what he took back in May and got nothing in return. Xi looks like a hero to his people and I don’t think there is any way that China is making a deal like the one they supposedly got close to in the spring.

Regarding market reaction, I expect it to be positive, but certainly not the home run it would have been before stock rallied so sharply. In other words, stocks were definitely anticipating a positive outcome to some extent. We saw an overall rally with the most tariff sensitive sector, semiconductors, behave very well last week. At the same time, gold stopped going up and I argued on Twitter that a peak may be in. Crude oil jumped nicely as investors believe that global economic growth will pick up with a deal, something I doubt personally. I don’t have a strong opinion on the bond market, but it would be very telling if bonds resisted declining and saw some strength.

Heading into the new week, month and quarter, stocks should jump significantly at the open; no shock there. We want to watch which sectors lead after the first 30 minutes are in the books. We also want to see if stocks can make new intra-day highs after the first hour or so to give the bulls a runway to the close. I have some doubts in that department.

You will  likely hear that because it is a holiday shortened week and a big vacation week that liquidity will be on the light side. Don’t bet on it! Having known about the Trump/Xi meeting at the G20 for weeks, no one who manages money for a living would plan on being away from the markets to begin the week. Whoever spews such nonsense really is a clown.

Finally, with the G20 meeting in the rear view mirror, the next big event is only days away with Friday’s release of the June Nonfarm Payrolls (employment) report. That report should have a heavy influence on the FOMC’s meeting at the end of July.

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HUGE Crosscurrents on Friday

Interesting day on Friday. We have end of week, month, quarter and first half of 2019. The skeptic in me says some portfolio managers could play some games to mark up their positions. I know. I know. You are SHOCKED to hear this. I mean, money wouldn’t cause people to do unscrupulous things, right?

Next, we have the last day for positioning ahead of the G20 meeting in Japan where Presidents Trump and Xi will meet tonight to discuss the tariff tantrum. I really would be surprised if Trump doesn’t basically lay down and meet some of Xi’s demands before talks can be restarted. I think Trump sees a weakening economy that will only be made weaker by all these tariffs. With a reelection campaign kicked off, the president can ill afford even the whiff of a recession between now and election day. I think he has a steep uphill battle in that regard.

The Russell Company is holding it s annual rebalance today when all of the Russell indices will have new and updated constituents with the most popular being the Russell 2000 Index of small cap companies. Over the years, I have noticed some “curious” behavior in the Russell 2000 on rebalance day. Hundreds of billions of dollars are potentially involved and portfolio managers have to decide whether to rebalance all at once, over the course of the day or over a few days.

Friday also ends one of the weakest weeks of the year historically, however, the bears really only had one good day to show for it. Finally, Friday also ends a very short-term trend where small caps outperform large caps. Lots of crosscurrents for sure, but the real fireworks look to be in July with the outcome of the Trump/Xi meeting, June employment report and FOMC meeting at the end of the month.

Stocks certainly are expecting some favorable outcomes, but I wouldn’t say there is a ton of air under the stock market. Our models are on the defensive side for now, but I don’t see more than a single digit pullback if it even comes. I just don’t think it’s a great time to be loaded up with risk, regardless of what happens next week.

*Side note: This update was supposed to go out this morning and I thought it had. Sorry about that!

 

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Bears Finally Get a Tiny Win But Tweet Watch Remains in Play for the Weekend

Tuesday was the first real down day since May. By “real”, I am referring to a day where stocks open near the highs for the day and close near the lows. Given that it’s the last week of June, that speak volumes for how strong the bulls have been. Unless stocks are going to fall hard right here, which I doubt, the bulls should make at least a little stand on Wednesday morning.

As I have been writing about for the past few weeks, however, I thought that behavior was changing as some of our stock market models were buried in negative territory. I had to balance that against some true positives like the performance of junk bonds and the broad participation in the rally based on the NYSE A/D Line. Shorter-term price action looked like the rally wasn’t quite complete until new highs were finally seen last week.

The calendar also was not on the bulls’ as the week after June option expiration (i.e., this week) was clearly skewed to the bears based on history.

Given Trump’s impending meeting with Xi on Saturday at the G20 in Japan, it’s very difficult to analyze the data and forecast what might happen in the markets come next week. As you know from my past posts, I really hate that markets on constantly on tweet watch. That’s no way to manage risk and run portfolios. But that’s what we have so we all have to deal with it as best we can. In one sense, the playing field is about level as it has ever been.

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Mixed Messages – Playing a Little Defense

Earlier last week I wrote about a very binary outcome for stocks. You can reread it here. I thought a bigger move was coming, but the direction wasn’t totally clear. While stocks broke out to the upside across the board, the move was a bit more muted than I anticipated. With so many short-term indicators locked and loaded for higher prices at the time, I will say that the bulls should be a little disappointed. Of course, they could play catch up and render my comments moot.

On the flip side, a few of my stock market models have been in negative positions and continue to flash warning signs. I originally thought that perhaps stocks would breakout to the upside and then reverse lower, turning the break into a fake. That’s still where I am looking. Mid and small caps are really lagging. Only discretionary is leading of my four key sectors. Volume is not constructive and stocks haven’t been closing near the highs on strong up days.

Part of the negativity can be tempered by the strong performance of the junk bond sector along with very broad participation in stocks as viewed by the NYSE A/D Line. In short, I am not excited about the short-term direction for stocks and chose to play a little defense. I think worst case, stocks could pullback mid single digits before another assault on new highs begins.

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Post Fed – A Rate Cut – SERIOUSLY?!?!

Jay Powell & Company gave the markets exactly what they wanted on Wednesday. They threaded the needle which is no easy feat. As someone who has been very critical of the Fed, I have to give them props for not upsetting the apple cart. The problem now is that markets are pricing in a 100% chance of a interest rate cut in July which doesn’t sit well with me. If stocks continue rallying, how can the Fed really give it more juice?

The Fed has now gone from being concerned about inflation to trying to stimulate inflation, all in 6 months. If the June employment report due out on July 5th is not weak, how could the Fed cut rates with unemployment below 4%? I guess if trade talks with China fail at the end of next week, the cover will be that the FOMC will cut in July in anticipation of slower growth because of the tariffs. Trump and Xi are supposed to meet at the end of the month at the G20 in Japan. The June employment report will be released on July 5. Like everything else, we will watch and see what happens.

 

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Insurance Rate Cut, Oasis in a Recessionary Desert, Dow 30,000

Here we go. We went a whole two FOMC meetings without the media labeling them something like, “the most important Fed meeting ever”. That was a whole 12 week respite. But fear not, there is widespread labeling today that there has never been a more important FOMC meeting than the one ending today at 2:00 pm. Before I begin to unpack today and what lies ahead, I want to extend a thank you for the support I have received since my accident. I feel great and I am healing way ahead of schedule. It’s been nothing short of miraculous. I am one lucky guy.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong trend for stocks to close the day higher. Finally, the other strong trend is to see stocks surge between 2 pm and 4 pm. Given the strong rally in stocks over the last 5 and 10 days, the trends should be somewhat muted.

No Rate Hike Today. July on the Table

The FOMC is not cutting interest rates today. I know the media has played up the possibility, but the market has only priced in a 20% chance of a cut and few are really expecting any action. Shockingly, at least to me, the market has priced in an 80% chance of a rate cut at the end of July. Right now, I don’t see it.

While the Fed supposedly doesn’t use the stock market as an interest rate guide, the stock market is now just about 1% from all-time highs, certainly not in need of rescue like it did in December. Economic data has been mixed. The most recent employment report was weak, but retail sales have had a bit of a resurgence. Housing continues its struggle from what was (no longer) higher mortgage rates and the capping of state and local tax (SALT). However, consumer sentiment and confidence has rallied yet again. The demise of the consumer seems to have been greatly exaggerated, at least so far.

Adding all of the preceding up, I find it very hard to argue for lower interest rates. Now, we all know there is more than just what I mentioned. The FOMC had been raising rates as GDP strengthened. GDP is now tailing off a bit. The FOMC had been concerned about inflation that hasn’t materialized at all in over 10 years. There is no present worry about inflation, either at the core or including “volatile” food and energy.

Europe’s economy is weakening to the point of needing stimulus from the European Central Bank. China’s economy has been severely hurt by U.S. tariffs. Some will argue that the U.S. economy can’t continue as an oasis in an otherwise recessionary desert. If the Fed moves to rate cut alert, it would be doing so purely as insurance and not based on their Congressional mandate of maximum employment and price stability.

What to Expect in the Statement

Overall, it is widely expected that the message from Powell & Co. will be dovish. In other words, the Fed should move the message towards an interest rate cut without actually doing one. As with every FOMC meeting, pundits and the computer algorithms will quickly parse Jay Powell’s statement for material changes from the last meeting. It is widely expected that the FOMC will remove the word “patience” from its statement. Yes, I know. It’s hard to believe that the markets will hang in the balance for the removal of a single word in the statement. Analysts will also quickly turn to the “dot plot”, an anonymous forecast, FOMC member by FOMC member, of where they forecast the Federal Funds Rate to be in the future.

And Then There’s Trump

Everyone knows that this presidency has been different and unique from all others. Regarding the Fed, President Trump has certainly tossed aside all historical norms. Until Trump, the President did not comment about the Fed, its chair or its policies out of respect for its independence and for fear of rattling the global markets. We now know the latter has been debunked. Donald Trump has been a very vocal critic of Jay Powell and the Fed’s policies, even though the President chose Powell to lead the Fed. Frankly, I find it very uncomfortable that the President criticizes Powell and the Fed or even speaks about them at all. I don’t think that’s healthy. But I don’t get a vote in that regard.

Some have wrongly speculated that the last rate hike in 2018 was some sort of payback by Powell and the Fed to Trump. I find that to be absolute nonsense. Why would the body responsible for the economy do intentional harm? They wouldn’t. Lately, there has been talk of Powell being demoted or terminated as chair. I rate that as very unlikely.

The Fed also has to deal with what I have affectionately referred as the Trump Tariff Tantrum. As I have written since day one, no one wins a trade war. Some just lose less. The on again, off again tariff war with mainly China has put the Fed in a difficult position. If all threatened tariffs proceed ahead, then you can certainly make the argument that an insurance rate cut or even two makes perfect sense. If a deal is reached with China, then the economy should see a small bump higher.

Mild Recession Coming by the Election

Whatever happens, one thing is almost a certainly. The Fed will not forecast the next recession.

WHY?

Because in the history of the Federal Reserve, the Fed has never, ever accurately predicted the next recession. They are perfectly in their incompetence! You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is almost always late. 1995 was the exception and they threaded the needle. For years, I have criticized them for raising rates and selling assets. I thought it would fertilize the landscape for recession. The tax cuts forestalled that, but the next recession is coming, but to be fair, it’s always coming. I continue to believe that a mild recession will begin before the election. For sure, it will be interesting to see if the Fed begins a rate cut cycle and that somehow pushes recession out for years. I don’t have strong confidence, but I will certainly root for that to be the case.

Housing remains very challenging with what was higher mortgage rates, millennial behavior changes and the capping of state and local taxes at $10,000 from the 2017 tax cuts. Credit card and auto delinquencies remain elevated in the face of the good economy. The tariffs are the big question mark. A full-fledged tariff war with a teetering economy could tip us over. The next 17 months into the election are going to be interesting and full of “fun”.

Stocks Set to Burst to New Highs Before Declining

Since the last Fed meeting, the stock market has gone essentially nowhere. In between, we saw a 7% decline and roughly the same rally. Both seem to have been strongly influenced by the Fed and the tariffs to a lesser degree. My long-term message remains unchanged. The bull market is alive and reasonably well. Dow 27,000 should be seen sooner than later with a chance at 30,000 by Q1 2020. Higher stock prices will make it more challenging for the Fed to cut rates.

Over the intermediate-term, I have a small but growing list of concerns that is causing me to shift from buying the dip to selling the rally. Stocks are positioned to see one more burst higher to new highs on the Dow and S&P 500. The NASDAQ 100 may also follow suit, but I doubt the S&P 400 and Russell 2000 will. If we do see that surge to new highs, I think it happens right here. The worst thing for stocks would be a quick push higher post 2 pm today and then a decline with a close near the lows for the day. That could set stocks up for another single digit pullback.

Semiconductors are not leading. Neither are transports. Banks continue to look very appealing to me, but they are not leading yet. Only consumer discretionary is in a leadership position from my key group. High yield bonds are acting well, but they could be stronger, especially of late. Very importantly for the sustainability of the bull market, the New York Stock Exchange Advance/Decline Line which you can see in the second chart below, continues to make new high after new high. Bull markets do not end with behavior like this. There is widespread participation in the rally, even though it’s not perfect, or at least not yet.

With stocks rallying sharply into the FOMC meeting, there is certainly a chance of selling the news or disappointing. There is also a chance that stocks surge and then fall. The only scenario which seems unlikely right here is for stocks to blast off, unabated. That path would definitely catch me off guard. After today concludes, it’s also one road I will need to do work on to figure out how to best navigate.

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Big Move Coming. Binary Outcome.

The stock market begins the week in digestion mode as the Fed meeting looms on Tuesday and Wednesday. Stocks rallied in vertical fashion from June 3 to June 11 and have now paused. The next move should be a good one, whichever direction prices break. The longer the consolidation lasts, the more I would be on the lookout for a fake out, meaning that the first move out of the range sucks people in and then immediately reverses for the real move.

Taking a slightly longer-term view, the rally in stocks off of the bottom can be viewed as “impulsive”, meaning it is the very powerful beginning of something much bigger as you can see below. If this read is correct, the next move will be higher and match the magnitude of the impulse. In other words, stocks would scream higher to new highs.

If the rally off the June bottom is not impulsive and it fails where it says “Can’t Fail Here”, the entire move in June would be retraced and new lows would be seen over the coming month or so. It’s a very binary outcome with a significant move in either direction.

Last week, I wrote about looking for bearish opportunities because a number of our models turned negative. Ignoring what I wrote above, the upside would be roughly 2% or right back to the old highs versus a downside of new lows or at least 6%. That’s 3:1 to the downside.

The outlook should clear up sooner than later and the outcome of the Fed meeting will be one event to help with that. Trump’s supposed meeting with Xi is another.

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Change in Character. Opportunity for the Bears

Earlier in the week, I offered that very short-term, nimble traders could sell the rally as stocks were beginning to look a little tired. I stick by that and still believe that’s a good strategy. Since then, several of our models have started to turn negative which changed my tone to be more defensive and less “risk on”. I think that will likely be the case into Q3 although that’s purely a guess. Of course, I could be wrong and might have to chase stocks higher down the road.

When I do a quick sector review, most of them look very similar with the exception of the defensive ones. They look tired which can be corrected by sideways movement or an orderly pullback. Utilities, REITs and staples look much healthier unless they close below their lows of last week. High yield bonds are holding up really well and that is one sector worth keeping front and center. Without junk bonds rolling over, it will be difficult for the bears to make much noise in stocks.

On the horizon we have the Fed set to meet this month along with the G20 and the anticipated meeting between Trump and Xi. Either could be a positive or negative catalyst although I have a tough time believing that Powell & Co. will cut interest rates this month.

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Sell the Rally? Mexico, Mega Mergers and Meat

The markets start the new week with an absolute cornucopia of news. We have mega mergers, Mexico, meat and employment. Obviously, the most important news comes as no surprise to anyone; the deal with Mexico to avoid the first in a series of tariffs on Mexican goods in response to the border and immigration. Stocks rallied sharply last week with an expected deal with Mexico as a significant contributor. The weaker than expected employment report on Friday was greeted with cheers as the markets were now expecting the Fed to cut interest rates at least three times by the end of Q1 2020.

After the strong run last week and the big up opening expected today, the stock market certainly has the feel of an opportunity to sell the news for the very short-term, nimble trader. Just like stocks went down very far an very fast, they rebounded in similar fashion. There is nothing wrong with taking a few chips off the table for a few days or so. Let’s see which indices and sectors lead today and how they close. Utilities saw a big downside reversal on Friday. If other “risk off” sectors follow, that could see funds eventually flow into my four key sectors which are “risk on”.

I want to finish by offering a few comments about the hottest IPO of 2019, Beyond Meat. The stock has now surged from roughly $40 to more than $160 in about a month. While everyone was focused on Lyft and Uber, this teeny, tiny company with a sliver of revenue has gone absolutely parabolic, reminiscent of the Dotcom days. There is no way to justify this behavior. It’s pure speculation, greed and froth. I don’t care about its future prospects. Should we start to see other IPOs behave like this, we will have a much bigger problem on our hands. For now, I consider this  a one off.

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Stocks Bottom on Schedule Catching Most By Surprise

For the last two weeks, I have written about the bottom I saw coming and how I would favor stocks over bonds. I didn’t write about a 10%+ correction nor a bear market beginning. I was very clear that I thought the stock market was experiencing a routine, normal and healthy bull market pullback that began on May 1 after the last Fed meeting. On May 13 as many of our short-term indicators signaled that the vast majority of the weakness should be over, I was concerned that the decline did not seem complete. I thought we needed to see at least one more move to new lows where the major stock market indices did not close near their lows for the day. We saw that on May 29 and again on June 3 where the pullback appeared to be over.

As I write about all the time, bull markets typically end a certain way. At the peak on May 1, there was not a single indication that the bull market was ending. As the pullback gained steam, there was an ever-growing chorus of gurus calling for the end of the bull market for all of these far fetched reasons like tariffs and recession. The market said otherwise. I was surprised at how investors were reacting to a little ole 6% pullback.

Option traders in the bottom half of the chart below were positioning for much lower prices. As you know, en masse, they are usually wrong. Sentiment surveys were showing a spike in bearishness that is usually seen after at a 10% decline. I don’t what had people so amped up for lower prices, but they were quickly punished.

As stocks bottomed this week, the media scrambled to assign credit for the low. First it was Fed Chair, Jay Powell, who essentially said nothing new. Then it was some mildly weaker economic data followed by hopes that a deal with Mexico would be reached. Today, we hear that stocks are rallying because monthly jobs data was weak and would lead to a rate cut. I also saw the media say that stock are up because Chinese President Xi said he likes President Trump. You just can’t make this stuff up.

As stocks have been rallying, look at the lower chart below which represents the number of stocks making new 52 week highs on the New York Stock Exchange. There is real underlying strength here and clearly no sign of a bear market or major collapse.

Finally, among many things in the media which have been wrong, I found it so beyond “curious” that word leaked out that famed investor Stan Druckenmiller had sold all of his stocks and bought treasury bonds after Trump’s tweet regarding Mexico. What took so long? Why did it come out precisely as stocks had bottomed? The skeptic in me wonders whether the timing coincided with Druckenmiller trying to buy stocks again after they already left the starting line.

It’s amazing how quickly stocks turned on a dime and the news narrative has changed from all of the negative consequences concerning tariffs and the coming recession to the Fed about to begin a rate cutting cycle which would rescue the economy and markets. My tune has never wavered. The bull market remains alive and al-time highs should be seen in Q3.

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