Update 71: Why Are Stocks Rising? In A Word-LIQUIDITY!
Option Professor Weekly Market Update
December 6, 2019
THIS WEEK/NEXT WEEK
Stocks zoomed back up late this week as the Unemployment Report caught many by surprise with a jump of 266K jobs
versus an expectation of about 180K & a low ADP number mid-week. As of this writing mid-day Friday; the S&P 500, Nasdaq,
and Dow have been pressing their all time highs while the RUT has made new 52 wk high as banks & biotech have been roaring.
Important to note that the RUT is still well below its all time high around 1750 & the Transports (DJTA) has not only not made new 52 wk highs but is about 1,000 pts off it’s all time high. The VIX zoomed to about 18 this week during the sharp pullback
earlier this week and has now filled in most of its gaps. If President Trump feels he’s playing with “house money” and wants to
be viewed as a tough negotiator….we may see tariffs on Dec 15….stocks pullback to fill in some gaps maybe toward the breakout point of 3030 basis the S&P…..and he may play the trade deal card closer to spring so he gets the biggest bang before elections.
Stock Market
How much LIQUIDITY is being thrown at these markets to keep them going…try this…..$60 Billion a month by the FED claiming it’s not QE at the front end to keep money market rates low encouraging speculation to get your required yields……then you have the ECB putting in $22 Billion to keep those interest rates negative and a plodding economy going….followed by corporations buying their own stocks back (hey how about rolling that money into increased wages & benefits for the employees who actually do the work?)…this I’ve heard is about $5 Billion a day!….with a possible rush into year end and finally there has been $189 Billion and if prices keep going and sentiment remains hot…it’s possible that a chunk of that money will return to the buy side.
With stocks like AAPL trading 30% above its 200 day moving average and sentiment and short term technical readings running hot….Does it make sense to know the uses & risks of how Covered Calls, Collars, and Married Puts work to protect values?
Next Week we’ll have to see if this run is sustainable and until we stop making new highs daily/weekly basis…..be patient.
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Bond Market
What a week!..we saw the TLT (proxy for 20 yr Treasuries) explode to 142 area earlier in the week as the market dropped quickly
on negative trade talks…..then fall apart as the stocks rebound and the jobs report got traders reversing their positions…both trades highlight the ILIQUIDITY of the financial markets should eventss turn and the algo and the public all want the same trade done with not a whole lot of volume on the other side of the trade. Specifically…should an event cause sharp selling in BBB’s
(the lowest level and most crowded rating on investment grade corporates)…I’m not so sure it would not be a mess if the re-balancing that funds who are required to purchase investment grade only be forced to sell bonds that dip below. Many states have very underfunded pensions and if Europe picks up nest year as some suspect with La Garde at the helm…things could get dicey…..now if the Central Banks plan on just printing to meet every crisis…you wonder if the US Dollar & inflation will react.
Base case..10 yr Treasury gets above 2.25-2.5%—bulls in trouble…..under 1.5%…maybe a zero handle on the 10yr is in the cards
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US Dollar
The Dollar rolled over a bit to the downside this week with a bit of a snap back today after the jobs report showed 3.5% unemployment (best since 1969) and 266K jobs added which shocked many but reallyy isn’t there always a jump with seasonal hiring and consumers spending and WMT TGT and the like doing very well?….if Europe gets some stimulus package out of LaGarde & Germany and Brexit gets resolved & Japan benefits from increased business plus OPEC cuts help energy rich Aussies
& Canada….then one might think 2020 could be the year of the trading range breaking to the downside..under 94-95…be careful.
Crude Oil
As we said previously the oil stocks in some case have been catching a bid (BP.CVX,SLB ect) and now we know why as OPEC met this week and cuts appear to be on their way…plus the ARAMCO deal is coming and may be attractive to some investors as they remain the #1 oil producer and have plans to pay out 75 Billion in dividends barely..conversely some do not like the control that the Saudis retain as far as regulation & the valuation appears to be the richest in the industry….plus why now are they selling??
Gold/Silver
Short term players who bought price strength in the metals have gotten stung when after 7 years of basically down prices we broke out and had a big run to the 1580 area starting about mid year. As we said; the metals were very overbought technically and running into resistance in the lows of 2012 at about 1580 so probabilities favored a pullback & consolidation which is exactly what has happened. Now…if you believe that all this paper debt, deficits, printing of money will end badly over time then you would still consider yourself a bull…then pullbacks to support areas would be buying opportunities….we identified 3 areas in our opinion 1450-1400-1350 (original technical breakout point)….if we are to see deflation/strong dollar/recession then the bull case may not materialize…if the Fed wants and thinks it can get its inflation target and the administartions wants a lower dollar for
trade benefits (40% of S&P earnings come from overseas)…and the low term moving averages continue up./bullish story remains.
Soybeans
We await the Phase I deal which is supposed to shower us with buy orders and access to the Chinese markets…..so far that has been like Waiting for Godot…..prices jumped above our first resistance area of $9 but failed twice this year at the $950 neighborhood with the $10 resistance looming above. Since it sometimes seems we are in some orchestrated movie….maybe
we will see a trade deal this spring and if the weather doesn’t cooperate during the planting season and growing season next year maybe that is the time frame for possible fireworks although one might anticipate that scenario should prices start escalating as we approach that time frame….at any rate so far we remain in our yearly range.
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