Update 77: Stock Market-Cracks in the Armour
January 24, 2020
Observations & Opinions
Last week/This Week…After making all-time high on Wednesday and retesting them Thursday; both the S&P 500 and the Nasdaq sold off about 1% and ETF’s on SPY & QQQ saw Outflows as a myriad of things that came up not the least of concerns about the new virus spreading out of China. Thankfully; so far it has not reached the level of SARS back in the day but that was also combined with an invasion to Iraq so it is difficult to identify the cause and effect of such disturbing news. Also; some of the earnings did OK but with a very low bar of expectation & comparison. INTC popped on its beat and some say 72-76 may be in its future which follows a pop & fade from IBM wherein we went 10 bucks up and took a fib 6 bucks back…INTC to mimic? Inflows into ETF’s like
ESG’s (ESGU_ESGE) after all the banter in Davos on solutions & Sustainability. Also; inflows into consumer discretionary Gold and
small caps. Dalio says cash is trash so rather try to get a diversified portfolio so that you can try to weather various climates. Van Eck’s ETF’s GOAT & MOAT sounded kind of interesting for those seeking a diversified approach. The big story last week was also
the drop in yields on the Treasuries below some trend lines and the tightness of the 2-10 spread..banks hated it JPM lost 8 bucks.
We looked to 3340-3400 as a possible area of exhaustion of which to consider hedging, sell tactics and allocation changes a some
sharp people think the odds have changed and your stock allocation could be less now than 3-5 years ago….Big week ahead in earnings in many sectors & economic news & Brexit…..so let’s get price evidence and see pattern recognition to establish points.
Stock Market
Obviously the virus instigated a vibe of risk off by the end of the week (biggest drop since Oct) but too early to say short term top is in but with a slew of technical indicators flashing hot for awhile so a little hot coffee was a bit overdue….Dow Transports & RUT sold off to approach their 50 day moving averages and S&P 500 is about 100 points lower (3195)..the 200 day is near the breakout point around 3 grand. China stocks got whacked a bit..for example WYNN & BABA & TCEHY/JD/BIDU lost about 10%+ and bulls may see value. Two concerns was the spike in the VIX at one point Friday up almost 25% in a day hitting almost 16 before settling back & a report from UBS that a survey of wealthy investors showed 94% expect positive returns from stocks this year..a dramatic difference from the reading prior to the Q4 run. Bulls do not want to see a VIX above 18-22 and complacency appears to reign.
Some say AAPL is destined to reach 2 Trillion market cap….SMH has been on fire…TSLA’s been blowing off….and will the FED blow out their balance sheet to new highs or moderate as we approach mid year?…shorts have been blown out….more buybacks at these levels/valuations?….put/call ratios-RSI’s…watch VIX & Treasuries yields & earnings-guidance & 3340…..Earnings this week from DR Horton, 3M, SBUX, PFE, AAPL, MSFT, FB, MCD, BA, KO, UPS, BIIB, AMZN, CVX, CAT, HON TSLA….we should know soon.
Bond Market
OK…the winds of change in Treasuries are blowing…..but a head fake toward lower yields or a recessionary tell? Last week the 10 yr Treasury took at some technical support around 1.75%-1.8% as a risk off vibe had money flowing to safety (utilities rose too).
The proxy for the 20 yr Treasury is TLT and our position has been a break above 142-146 could spell lower rates and some see more FED cuts if the economy slows or stocks roll over. We should know soon whether this is a head fake and the economy and growth will accelerate or if this boom bust cycle is closing in on its end game. A move back above 1.80% would put the higher yields are coming chant back in vogue. As we’ve said the explosion of debt issuance is off the charts and some sectors have some dodgy covenants, leverage, liquidity concerns but for now the world is viewing debt like Alfred E Newman philosophy…What Me Worry?
This week durable goods, Fed decision, wholesale inventories, GDP, German inflation, BOE rate decision, PMI’s, Personal Income
and spending (70% of economic growth) should give us and Central Bankers an idea if the market is ahead of earnings & growth.
One thing that the markets have not priced in at all is inflation and Gold had good inflows this week…smart $$$ or sucker bet?
US Dollar
As we’ve said here for longer than I care to admit…our view is that the Dollar is range bound about 99-95 levels. Last week we had a mid range handle at 97 and change…so what is it doing?..Nothing but coiling and coiling….to do what? well…that depends on how the numbers come out…if we see lower interest rates and a slowing or bite your tongue…a recession in the next year or so…….then the 95 could get taken out and even 90 as a post bubble 1999 deal unfold where the DXY went from 120 to 70-80.
If we see GDP take off and all the cards come out proper then a Dollar stampede such as 1997 to 2001 could shock the $$$ bears.
The yield advantage and the growth edge continues to underpin the greenback with no end in sight….yet.
Crude Oil
January has been a rough racket for Crude ass the January Effect has been throw the baby out with the bath water as price have come almost 20% off their highs in a matter of weeks. Why?…well lots of reasons among which is our ability to produce so much here in the USA. inventory levels and supplies in storage are huge and of course the Green Mob promoting EV’s & sustainability.
As we said last week when we were 58+…the 50 & 200 day moving averages are ball park 52 & 55 so staying at or above those levels is preferable so as to turn & cross those averages. If we break and sustain prices under 50..you may hear TIMBER! as that could be the energy junk bonds tanking ass these guys cannot afford bankruptcies and defaults as some of these companies cannot meet obligations without higher prices as they do not generate free cash flow. We see APA & COP & VLO still trading above their 200 day moving averages while airline stocks Southwest LUV & Jet Blue JBLU seem to be catching a bid recently. Stay Tuned.
Gold-Silver-Copper
Slower China GDP possibilities & the Virus knocked the stuffing out of copper prices last week as that resistance we spoke of last week at 3 bucks ball park proved too much. It also sent investors in Freeport McMoran FCX hitting the bricks off 10-14% in 10 days.
Gold & Silver were horses of a different color in the past 2 weeks as money flow in the ETF reversed an outflow & had impressive Inflows this past week not unexpectedly basis the underlying price action. The week ahead is important for both markets to sustain and improve on their advances as the dollar remains firm and the FED & Central Banks printing presses (check M3/CB balance sheet explosions) and you’ll understand the renewed interest in Gresham’s Law, French Coin Clipping & the Weimar Republic.
As we stated. the GDX, GDXJ, PAAS, SLV, SIL, SILJ and many other remain and have remained above their 200 day moving averages.
Some respected people in the investment community tout a % in Gold makes sense and we believe participation overall is light.
Soybeans-Oil Grains Softs
Well the China deal showed up and what happened?…Beans/Bean Oil went into the tank losing about 5% from it’s highs.
Again as stated; a bumper crop and a devalued currency down in Brazil is a double whammy that so far has been tough to overcome…let’s see what spring planting and summer growing news can do for the supply demand dynamic but until beans can get above 950 and 10 (2 resistance zones we brought to your attention all last year)..a screaming bull market must wait. Sugar prices have had legs over the last 3 months but last week pulled back. Remember Vanguard ha a Commodity Strategy Fund
VCMDX which so far hasn’t done much but the prospectus would be helpful to increase understanding
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