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InvestmentHouse - Has the Market Character Changed? (Weekend Newsletter)

https://news.investmenthouse.com/2019/01/the-daily-part-1-of-3-1-5-19.html

- Powell becomes stock whisperer by simply saying 'I'm listening.'
- Chinese RRR cut, confirmation of a US/China trade meeting warmed up stocks even before Powell.
- Boffo jobs report heralded as proof of a strong economy making ISM, PMI's, and other weakening data meaningless. Sure. Yeah right.
- As goes the first week of January? Massive downside, massive upside. Looking forward to that . . .
- Earnings are fast approaching. Before the bounce Friday it certainly looked as if investor expectations were too low.
- Some say the market character just changed. We will see this week.

The Dr. Jekyll/Mr. Hyde market displayed its extremes this week. After a pause in the relief move rolled over hard Thursday on the AAPL warning with DJ30 losing 660 points -- Mr. Hyde -- Friday saw Dr. Jekyll return with massive upside, the Dow rising 747 points. What looked to be a rollover and end to the relief bounce started late December rejected the selling and is trying to embark upon another upside leg. All of the indices scored massive gains from over 3% to well over 4%.



SP500 84.05, 3.43%
NASDAQ 275.36, 4.26%
Dj30 746.94, 3.29%
SP400 3.23%
RUTX 3.75%
SOX 4.37%
NASDAQ 100 4.48%

VOLUME: NYSE +15%, NASDAQ -2%. NYSE trade moved back above average for the first time in 5 sessions and it was not much above average. NASDAQ trade fell back below average: its downside volume Thursday was the highest trade since before Christmas. Thus, the impressive upside moves was not accompanied by convincing volume and indeed declining volume, indicating not the same buying conviction as on NYSE.

ADVANCE/DECLINE: NYSE +9.9:1, NASDAQ 6.2:1.


Now you will hear it was jobs, it was Powell, it was trade. Futures were sharply higher even before jobs or Powell. It was said the market was up because China and the US are having a trade meeting Monday, you know, the one they said three weeks ago they were going to have. Apparently just recycling a headline ahead of the event is enough for a good news hungry market.

The market was already primed to rebound. This even with jobs much, much stronger than expected. You would think that would spook stocks fearing a Fed hiking rates. It did, a bit, as futures sold back from their highs on the report. It was strong, but in examining the numbers, remember that jobs are lagging -- they trail the rest of the economy, continuing to rise as the economy has already started to falter. EXACTLY what is going on now.

Jobs: 312K vs 176K exp vs 176 Nov (from 155K). October 274K from 237K.

3 month average: 254,000

Unemployment: 3.9% vs 3.7% as 400K reentered workforce.

Earnings: 0.4%, 3.2% year/year to 27.49 (+0.11)

Workweek: 34.5 vs 34.4

Participation: 63.1 vs 62.9 prior

Healthcare: 50K
Restaurants/Bars: 41K
Construction: 38K

Great earnings growth, a strong participation jump, strong revisions. Again, however, you have to look at the leading economy such as ISM, regional PMI's -- they are slowing even as the Fed considers more hikes.


Powell then whispered sweet nothings to the market in a press conference with his predecessors Yellen and Bernanke. They all back-slapped one another on jobs well done, but it was up to Powell to tap dance for the markets, and he did the job I assume he wanted to do. All it took was borrowing a phrase from the television show 'Frasier,' the Harvard-educated radio psychologist whose catch-line was 'I'm listening.'


I'm listening . . . I said, I am listening
Who do you trust more?

Powell assured investors the Fed is "prepared to adjust policy quickly and flexibly," that there "is no preset path for policy." Then he topped it off with the assurance the Fed is "listening carefully to the market" and would adjust balance sheet normalization "if needed" and if it becomes a market and economic issue.

At that point it was clear the premarket and early gains were just the preliminaries. The party started and stocks surged to the close.

But can you believe Powell? When listening to Cleveland Fed president Mester earlier in the day, the utter lack of understanding of economic reality versus economic theory is astounding and indeed, given the Fed controls our money, disheartening and indeed frightening.

Mester said the outlook was for 1 to 2 hikes in 2019, but if inflation did not rise the Fed could stop. Laughable for many reasons.

First, the Fed just lowered its view of 2019 growth to 2.3% at its last meeting. How is that an overheating economy? It has always been the view by the misguided Phillips Curve followers that the US economy can easily grow 3% with no inflation, no need for slowing. So why is the Fed trying to prevent overheating (in its own words) when it is lowering its GDP forecast? It believes that economic strength causes inflation. Could it be that what I warned would happened during the Obama years has happened, i.e. that we were 'dumbed-down' to believe that 2% to 2.5% GDP growth was 'great?' Exactly the case. After 10 years with no 3% average GDP growth for the first time since the Great Depression a new generation was taught that 2% growth was 'sustainable' and that above that threatened inflation. That has filtered all the way up to the Federal Reserve.

Second, Mester's premise is focused on the wrong data. Just as the 1929 Fed, the Greenspan Fed, and others, the Fed thinks inflation lurks behind every job, every economic success story, every wage increase. After years of declining wage growth the US citizen actually sees some wage gains. Hike rates! Whispers of Greenspan's 'wage-led' inflation warnings are uttered. Wages don't cause inflation. What causes inflation is slowing output with constant or rising demand. Thus, while Mester and her compadres hike rates to avoid inflation showing up, they fail to take into account that slowing supply with steady or rising demand due to LAGGING jobs and wage hikes leads to inflation. The Fed should be ENCOURAGING economic growth to prevent inflation, not hiking rates to 'prevent' it. The Fed is taking a normal slowdown in an expansion and turning it into a major slowdown with rate hikes. That CAUSES inflation as outlined above. Then it RAISES rates more to try and curb the inflation it caused. Madness. Madness that we sanction and allow to repeat time and time again, generation to generation.

So, with that mindset, while Powell placated the markets and secured a rally when the market was rolling over, you have to wonder when the Fed screws up again.


THE MARKET


CHARTS

After certainly looking like a rollover Thursday on rising volume, stocks rejected the selloff and surged back above pre-Thursday highs. That looks to have renewed the relief move for a second leg though NASDAQ volume trailed off well below average, not commensurate with the price gains.

SP500, DJ30: Both indices reversed ugly Thursday selling, gapping upside and rallying to the 20 day EMA on the close. That puts them at higher recovery highs with some better NYSE volume. Good enough for a continued move upside in the relief move, at least for now.

NASDAQ: Same action as the other large cap indices, gapping and rallying to close near the session highs and right at the 20 day EMA. A higher recovery high here as well, but short on volume. Not that key for a relief move, however, and NASDAQ may have just put itself in position to rally to 7,000 (closed at 6739).

SOX: Gapped higher, rallied as well, making it to the October and November lows, the bottom of the prior range. Key point for SOX as it is below its January high, having taken a pounding on the AAPL warning.

SP400: Sharp move higher from the pause. SP400 never really sold off that hard and Friday burst through the 10 day EMA and near the 20 day EMA. The pattern setting up is one you have to watch on rebounds: the ABCD down pattern. This is where a bounce puts in a higher low and a higher high but all within the confines of the prior selloff. Like its cousin the ABCD upside pattern, it can catch the unwary going heavy long just as it prepares to roll back over.

RUTX: Similar to SP400 but a bit stronger pattern upside. Rallied to the 20 day EMA and has more room to run. You still have to be wary of the potential ABCD downside setup down the road a bit.


LEADERSHP

Consumer Products: Did not all share in the move higher, at least with not the same vigor. CLX doji below the 10 day EMA. PG did move up 2%, threatening the downside play. CL up modestly but still below the 10 day EMA.

FAANG: After the AAPL bomb lower it recovered some. GOOG looks interesting as it breaks up through the 50 day MA. NFLX gapped over the 50 day MA. AMZN continued up to the 50 day MA and we took some gain at our target. FB is up some, still below the 50 day MA.

Software: Mostly higher as it is a stronger group. WDAY surged 6%. SPLK 7% and through the 200 day SMA. TEAM was a laggard, barely higher. PANW up but not impressive. CRM broke higher through the 200 day SMA. Some good stocks in great patterns moving, others trying to move.

Machinery: Some good breaks higher mimicking the NYSE indices. CMI up through the 20 day EMA. TEX so-so as was EMR. CAT up to the 50 day EMA on a 5+% move. Up but not that enticing.

Transports: Bounced from the Thursday flogging but did not change their patterns that much, e.g. DAL.

Retail: After posting good moves when the rest of the market was not, some were quiet, e.g., JWN, M, TGT. Others moved well, e.g. ROST, TJX.

Drugs: Some movement up off the Thursday selling. PFE bounced some while LLY, MRK bounced up off the 50 day MA.

Financial: Even with the Fed saying it would be patient, the banks continued their 2 week move higher: C, BAC, JPM. GS moving up over the 20 day EMA as it too continues its move.


MARKET STATS

DJ30
Stats: +746.94 points (+3.29%) to close at 23433.16

Nasdaq
Stats: +275.35 points (+4.26%) to close at 6738.86
Volume: 2.59B (-1.52%)

Up Volume: 2.33B (+1.525B)
Down Volume: 239.16M (-1.571B)

A/D and Hi/Lo: Advancers led 6.23 to 1
Previous Session: Decliners led 2.27 to 1

New Highs: 10 (-2)
New Lows: 35 (-21)

S&P
Stats: +84.05 points (+3.43%) to close at 2531.94
NYSE Volume: 1.098B (+15.34%)

Up Volume: 1.051B (+740.581M)
Down Volume: 43.485M (-588.643M)

A/D and Hi/Lo: Advancers led 9.9 to 1
Previous Session: Decliners led 1.4 to 1

New Highs: 6 (-6)
New Lows: 11 (-29)


SENTIMENT

VIX: 21.38; -4.07
VXN: 28.57; -3.61
VXO: 24.38; -3.88

Put/Call Ratio (CBOE): 0.91; -0.40

Bulls and Bears:

Now THAT is a move. Both bulls and bears. Yes, a crossover in just about record time. Is this now indicating a bottom in stocks? Yes and no. It is an indicator that takes time for the rally to occur. That said, stocks have bounced -- modestly -- paused, and arguably in position to continue the bounce. This indicator, however, is more of a longer term indicator. As such, it suggests more than a bounce. Interesting, but need more good patterns to support a bounce; that can happen over time, and as indicated this is not an immediate, Pavlovian market response. Regardless, this was an impressive move.


Bulls: 29.9 versus 39.3

Bears: 34.6 versus 21.4

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.




Bulls: 29.9 versus 39.3
39.3 versus 45.4 versus 46.7 versus 38.3 versus 39.6 versus 42.9 versus 42.5 versus 50.5 versus 51.9 versus 56.3 versus 61.8 versus 60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00

Bears: 34.6 versus 21.4
21.4 versus 20.4 versus 21.50 versus 20.6 versus 19.8 versus 19.0 versus 19.8 versus 19.8 versus 19.0 versus 18.3 versus 18.5 versus 18.6 versus 18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2


OTHER MARKETS

Bonds: 2.668% versus 2.552%. After the strong Tuesday through Thursday break higher, bonds gapped lower to test the 10 day EMA with a doji. Yields actually rose even as Powell indicated the Fed would be patient with hikes.

Historical: the last sub-2% rate was in November 2016 (1.867%). 2.552% versus 2.643% versus 2.686% versus 2.716% versus 2.774% versus 2.811% versus 2.736% versus 2.788% versus 2.803%. versus 2.762% versus 2.821% versus 2.855% versus 2.895% versus 2.913% versus 2.908% versus 2.884% versus 2.863% versus 2.854% versus 2.892% versus 2.915% versus 2.979% versus 2.993% versus 3.032% versus 3.061% versus 3.058% versus 3.059% versus 3.048% versus 3.065% versus 3.074% versus 3.056% versus 3.065% versus 3.116% versus 3.127% versus 3.147% versus 3.186% versus 3.239% versus 3.228% versus 3.222% versus 3.201% versus 3.22% versus 3.146%


EUR/USD: 1.13980 versus 1.13957. Still working laterally at the 50 day MA even with the violent moves higher and lower on the week.

Historical: 1.13957 versus 1.13343 versus 1.14450 versus 1.14425 versus 1.1432 versus 1.13588 versus 1.14015 versus 1.13708 versus 1.13828 versus 1.13755 versus 1.13533 versus 1.13049 versus 1.13604 versus 1.1376 versus 1.13244 versus 1.13657 versus 1.1404 versus 1.1376 versus 1.13970 versus 1.13360 versus 1.13199 versus 1.13934 versus 1.13682 versus 1.12973 versus 1.13325 versus 1.13380 versus 1.13829 versus 1.13818 versus 1.14484


USD/JPY: 108.517 versus 107.713. Dollar trying to recover the massive Wednesday drop. Slow move.

Historical: Last below 109 in June 2018: 107.173 versus 107.515 versus 109.687 versus 110.273 versus 110.845 versus 111.190 versus 110.337 versus 111.223 versus 111.21 versus 112.521 versus 112.477 versus 112.653 versus 113.382 versus 113.634 versus 113.634 versus 113.385 versus 113.022 versus 112.66 versus 112.71 versus 112.813 versus 113.581 versus 113.474 versus 113.402 versus 113.559 versus 113.781 versus 113.510 versus 112.972 versus 113.007 versus 113.077 versus 112.617 versus 112.831 versus 113.585 versus 113.576.


Oil: 47.96, +0.87. Oil continued its modest recovery, making it to the 20 day EMA.


Gold: 1285.80, -9.00. A strong 3 weeks but Friday after a gap higher gold reversed for a loss. Still held the 10 day EMA so still trending higher, but this coming week will tell more of the story.


MONDAY

The data feed slows some, but don't get too complacent: earnings are not far ahead and you have to wonder if expectations are lowered a bit too much. Of course, if stocks continue upside as they have on this bounce that primes them for disappointment after a strong move. We will have to see how this plays out, this renewed relief move.

While NYSE volume was up a bit, NASDAQ trade fell well below average -- not that big a deal for a bounce, but if wanting something stronger, not so great.

For now we continue playing a bounce. When a selloff is rejected as this one was, you play the upside move. That means plays such as FFIV, PG, QID would have to be closed down. We did not on Friday because the move was so violent you typically get some retracement. Further, with the lower volume on NASDAQ, it is no lock the market continues higher: in an arena of dueling algorithms the swings are large and sudden. Could be the market heads back lower once the Powell statements are seen as nothing new, just placating the market. At least some are saying Powell could have changed the market's character for now. The Fed wields so much power it could affect such a change.

There are some strong moves that can give us some plays upside in a continuing bounce. If they continue moving we anticipate playing them. Frustrating so see such whiplash action: the futures were up 265 Dow points from the -660 Thursday before any news. In any event, it is what it is and we will play the good setups, e.g. GOOG, SPLK, if they continue to show good action, playing a continuing bounce.

Remember, the market just broke down from a yearlong topping pattern. This is the test of that first break lower. The indices likely move into the range of the prior lows and find resistance that stalls the move. The likelihood this 20% correction is enough to consolidate the entire move from early 2016 is low. The prior rallies suggest there is more selling to consolidate that tremendous move.

So, we don't despair, we play and take what the market gives us. After the Friday rejection of the rollover we see if it continues Monday. If so, we play more upside as noted. We don't become enamored with the upside given the huge top in place, but we also recognize the Fed can change the market character.

That said, also note that a mere cessation of hostilities against the economy is not, at this point, enough to stop the decline. The Fed would have to reverse policy, i.e. cut rates, perhaps add QE to turn the ship. The government won't produce any stimulus; the House democrats will not give the President anything so for the next 2 years at least there will be nothing on the fiscal side. That is why sages such as Art Cashin are calling not only for no rate cuts this year (he made this prediction a few weeks ago) but that the Fed will cut rates sooner than later.

Therefore, play the bounce if it continues; the repudiation of the Thursday selling is strong. Don't fall in love with the upside. Take good gains when in hand and when at or approaching logical resistance. Then see if good downside setups are in place, particularly if the indices are near the bottom of the prior range they crashed through in December. The downside will likely start from there to continue consolidating the huge move higher from early 2016.

Have a great weekend!