- Bounce off the bottom of the range that started early week is reversed. - NYSE indices break to lower closing lows. Can NASDAQ make a stand? - More leadership groups weaken. - China economic data sliding farther down. EU as well. - Retail Sales quite solid, prices soften. Isn't this want we want? Don't ask the Fed. - We have lived in a textbook of economic cause and effect, yet our wealth is ruled by people in denial of history. - Sentiment gets interesting with stock fund outflows jumping to a record. Everyone is negative as the indices break lower so watch for false breakdowns.
The week started with the indices hitting new selloff lows. They rebounded, however, the same session, putting in what looked to be a decent reversal off a lower low that just undercut the October low. Then some good news on trade, some mild inflation numbers, and a continued view the Fed was softening.
A bounce ensued, though it was halting at best. A gap higher Tuesday that faded to a loss or virtually no gain. A pair of moves upside Wednesday and Thursday, but neither could hold much of the upside. Friday the indices simply failed, at least on NYSE. Futures were lower and bids never materialized. The indices opened lower and then sold through the session, closing at the lows.
VOLUME: NYSE +8%, NASDAQ +2%. NYSE trade moved up to just over average. NASDAQ volume did move higher, but is still well below average. Selling volume for sure, but not blowout volume.
ADVANCE/DECLINE: NYSE -3.5:1, NASDAQ -3.2:1. Definitely on the strong side, definitely superior to any upside breadth of late.
SP500 and DJ30 closed at lower closing lows below the recent 3 month range. SP400 and RUTX were already there, and they continued to mine lower lows.
NASDAQ and SOX fared a bit better. NASDAQ again tested the 2016 trendline, holding it on the close. That kept it just over the November low. SOX gapped lower Friday but is still easily above the October, November and December lows. The chips showed some relative strength on the week mainly thanks to AVGO's rally along with INTC and AMD holding steady. Outside of that, chips were chippy.
After a week of tries at bouncing off the bottom of the range, struggling to find traction each session, stocks gave up Friday and sold early, avoiding the Christmas rush. They sold early, late, and in-between. Sentiment may be weak, and the market is taking down a leadership group at a time, but there is still no upside impetus.
The week saw the market damage, or outright take out, some leadership groups. What was left of retail was crushed as COST joined LULU and ULTA in their crashes. Food is under pressure as some sold off while others struggled. Not a dead group, however, as KR, KO, KDP held on, YUM survived Friday, while PEP, CMG went bad. Drugs were hit as JNJ was reported to have known about asbestos in its baby powder. Kiss of death that asbestos link. LLY sold on higher volume though hung onto the 50 day MA, PFE is struggling. None of these groups died except perhaps retail as it lost more huge names, but all are under pressure, even the drugs that should be a defensive sector.
NEWS/ECONOMY
Interesting news on the week, but not many draw the same conclusions from it, in an academic sense, that we do. Outside of academics, the data is what it is, the Fed will do what its members believe -- no matter how wrong, and the market and economy will react as usual, if they are not already doing so.
China: The economic data keeps getting worse for the 'emerging market economy' as it styles itself. Industrial output came in lower than expected at 5.4%, a 3 year low in the growth rate. Retails sales 8.1%, missing expectations and showing the slowest growth since 2003. Doom and gloom and it was blamed for the market weakness.
China is also rolling back its retaliatory 25% tariff on US autos for 3 months (the 90 day period). China has to do things at its own pace. The sides meet, discuss, Trump hints a big news to come, then when things die down, China makes its announcements. That is China's way of trying to make it look as if the idea was its own. Everyone knows the real score (other than the Chinese people), but that is its way.
EU: The union's economy expanded at its slowest rate in 4 years. France business activity turned negative. Germany is at a 4 year low in its growth pace. If I were the UK, given France is the EU's second largest economy and is turning negative, and Italy, the third largest EU economy is negative, I would tell the EU to stick it. Ah, but May in in charge and she is rather feckless. Gee, we have a FEW of those kind of government leaders over here.
US Retail Sales, Nov: 0.2% vs 0.1 exp vs 1.1% Oct (from 0.8)
Ex-auto: 0.2 vs 0.2 exp vs 1.0 prior (from 0.7)
Ex-auto, gas: 0.5% vs 0.7 prior (from 0.3)
Control Group: 0.9 vs 0.4 exp vs 0.7 prior (from 0.3)
Good number. The ex-auto/gas shows that sales were 'robust' once gasoline's lower price was factored out. Gasoline is one of those odd components: have to have it to get around to actually make the economy work, but it doesn't add anything, just subtracts. A sunk cost that is best to be at the lowest price possible so money can be used for other, more lasting things.
The key: the revisions. Impressive. Revisions are always more important as they show more clarity.
What the recent data shows.
Okay, here is something to consider when you listen to the media talk economics from their Keynesian view: First, the CPI and PPI were lower, indeed 'tame' by many standards. Of course, that scares Keynesians who want to devalue our currency with inflation as they think inflation is healthy as opposed to the erosion of wealth that in reality it is (they don't put it that way, but that is what their policies accomplish). Indeed, the Fed, to maintain its power grab over our lives these past 90 years, has convinced everyone that inflation is needed and is characteristic of a healthy economy. Thus, its 97% devaluation of the US dollar since its inception is justified to an easily gullible populace. An old but true example of what the Fed has accomplished: back in the early 1900's an ounce of gold could buy a good quality suit. Today an ounce of gold can still buy a good quality suit. The same amount of dollars from the early 1980's used to buy that suit would, today, not pay for the alterations. Not even the tax.
But I digress. What the data this week shows (tame CPI and PPI, solid retail sales) is the reality that the economy can grow and the citizens can be prosperous without triggering inflation and indeed without any inflation. Prices are lower for producers and buyers. That shows efficiency, functioning markets, free enterprise competition that reduces costs. At the same time, sales are higher. Companies are producing, jobs are plentiful, wages are up, people are buying. Gee, is that not what we missed for 10 years, desperately wanted, finally got with the changes in taxes, regulations, and bad deals? Why not celebrate?
In the Keynesian world that cannot happen. So Powell and Keynesians on the Fed panic in their confusion. Prices are lower and they should not be. So, in their quite limited world they believe they have to hike beyond neutral to control the inflation that surely is coming. It is inflation in their mind. This is why EVERY Fed from the 1920's central bank has crashed markets and caused recessions -- because the theory they espouse is based in CONTROL, NOT FREE MARKETS! Some day we will wake up and say just because the Fed has been devaluing our currency for almost 100 years that doesn't mean we were right in creating it and letting a dozen people control the value of our assets, to set the level of our wealth.
There are one or two in Congress who get it, at least the free market part. The others get it as well; it is just that they see the Fed as another very important method to control the general populace by controlling its wealth. The past 60 years have provided a living textbook as to what works economically with very definite cause and effect. Sure the political sides do all they can to obfuscate the clear facts, and the average American is too economically ignorant and too complacent on top of that to get as upset as the facts warrant.
Economics cause and effect: We have lived a textbook of what to do and what not.
In the early 1960's, JFK cut taxes and reduced regulation. Economic boom.
In the 1970's the US went off the gold standard, raised taxes back up, piled on mountains of regulations and we fell into what was called the Carter Malaise (though Nixon and Ford played large roles in this with Nixon freezing wages of all things--talk about Keynesian hogwash).
In the 1980's Reagan cut taxes, gave massive incentives to invest in the US for startups and big companies alike. It was called an era of deregulation. Boom. Huge boom. GDP quarters of 4%, 5%, 7%, 11% growth; again and again. Months with 1 million jobs created. Bush almost ruined it -- 8 years under Reagan, witnessed the boom, saw what worked, but had to try the James Baker theories and almost ruined the boom.
In the 1990's Clinton was smart enough not to get in the way of prosperity. He continued to reduce regulation thanks to a Congress that had popular support for a 'contract with America.' Great things were accomplished again until Clinton raised taxes because he told us it had to be done to cover our costs. When the boom still threw off huge amounts of tax revenues the costs were covered. Instead of lowering taxes, Clinton paid down the debt. A noble move but it took too much money out of the economy, money that should have been reinvested. He cut capital gains taxes and that helped, but too much money was removed, Greenspan went off the deep end for Y2K and then went the other way when 2000 started. The economy ran out of money. Crash.
In the 2000's Bush 2 cut taxes but his economics were a conflicting mass of mistakes. A bad tax cut squandered money. A good tax cut helped. Medicare Part D exploded the budget. Greenspan held rates too low too long to try and limp the housing market through the recession. Then it all exploded into the financial crisis. What a mess.
Then came Obama and his massive, massive, massive regulations. Tax hikes. The ACA and its regulations and tax hikes. Hundreds of thousands of new regulations IN ADDITION to the ACA's regulations. The economy posted its first 10 year period without a year of 3% average growth since the Great Depression. GDP stuck below 2%. The only jobs were created were bartenders, waitresses, retail -- the lowest wage areas. This even with the Fed holding rates at 0% and buying all of the junky assets anyone wanted to sell it. The stock market surged because that is where all the money went. Everything else outside of the government stagnated at best with millions of small businesses killed.
Then 2016 with tax cuts, investment incentives, repealing regulations. Investment renewed in the US. GDP jumped back up. More jobs than workers. High paying jobs that were never supposed to come back did just that. We still have 94+M working aged people OUT of the workforce, the ACA is still bleeding us dry, and more regulation reduction is needed. Just think what would happen if that occurred. It would be more like the 80's and the growth seen then.
You can see the change in policies and you can see the results. As the Frenchman in 'The Matrix Reloaded' said, cause and effect.
There is some more progress: a Texas federal district court Friday ruled the individual mandate unconstitutional. That sets up an appeal to the 5th Circuit Court of Appeals and on toward the Supreme Court. The issue is the repeal of the tax penalty: that is now removed from the law by Congress and that was the basis of the Supreme Court's initial ruling that upheld the ACA thanks to Chief Justice Robertson being a judicial activist and rewriting the law from the bench. With the fiction of the 'lawful tax' removed from the bill all you have left is the overreach under the Commerce Clause that the prior Court ruling said was unconstitutional. Ipso facto the ACA should now be unconstitutional.
THE MARKET
CHARTS
DJ30, SP500: Both closed at a new selloff closing low though still inside the October and November lows. The Dow is fading back to test that 2016 trendline once more. MACD still holding up for now.
NASDAQ: Gapped and sold off to the 2016 trendline, holding just over the November lows. Okay, NASDAQ at the lick log. MACD remains strong, areas such as software remain surprisingly strong, holding up NASDAQ.
SOX: Dancing over the June 2017 peak, the last one before the run to the high in February 2018. Still over the October, November, December lows and that keeps SOX in the game.
RUTX, SP400: Both diving lower, gapping and selling off to lower lows. SP400 is now lodged in the middle of the March to August 2017 trading range. This is an impressive, impressive selloff.
LEADERSHIP
Still some groups refusing to give in, but the problem for the market has been, while they don't give in at first, they eventually get dragged down. That is the MO of a bear market.
Defensive stocks: Some continued good moves on the week and Friday, e.g. PG, AEP, CLX, some did not, e.g. PEP, JNJ. Many held the line, but that is about all they did. For Friday that was good action. For longer term we will see. KR, KO, CL.
Food: Mixed action. CMG started getting shaky. PEP broke lower from its nice test. KO okay, MCD hanging in. Showing issues.
Drugs: JNJ clobbered on asbestos. PFE, LLY, MRK did not break but were hit on the day. Smaller biotechs felt heat on the week though held some decent patterns, e.g. ARWR, BCRX (though dropped harder Friday).
Personal Products: PG, CLX remained strong. Defensive.
Software: Some cracks e.g. ADBE dropping hard on earnings. VRSN struggled through Friday but is holding support. VMW to the 20 day EMA. FFIV broke lower and we started a downside play. WDAY still very strong in a great consolidation. ZS, SPLK, DATA, TEAM remain solid for now.
FAANG: AMZN broke lower 4%. AAPL broke lower on another downgrade. GOOG struggled Friday but is hanging in its range. FB not bad but still below the 50 day EMA.
THE MARKET
MARKET STATS
DJ30 Stats: -496.87 points (-2.02%) to close at 24100.51
Nasdaq Stats: -159.67 points (-2.26%) to close at 6910.66 Volume: 2.2B (+1.85%)
Up Volume: 490.54M (-187.77M) Down Volume: 1.69B (+230M)
A/D and Hi/Lo: Decliners led 3.18 to 1 Previous Session: Decliners led 2.87 to 1
New Highs: 12 (-4) New Lows: 517 (+165)
S&P Stats: -50.59 points (-1.91%) to close at 2599.95 NYSE Volume: 979.717M (+7.88%)
Up Volume: 181.265M (-182.388M) Down Volume: 792.319M (+265.212M)
A/D and Hi/Lo: Decliners led 3.47 to 1 Previous Session: Decliners led 1.79 to 1
New Highs: 16 (-9) New Lows: 616 (+238)
SENTIMENT
Outflows: $46B flowed out of US stock funds the prior week, a record. At the same time Money Market inflows hit a record as well. The market selling but NASDAQ and SOX are still holding above the lows, SP500 and DJ30 as well if measured by the intraday lows. The sentiment from the AAIA shows the most bearishness about the next six months in over a decade. This plays for a surprise bounce. They often happen when no one thinks it can, though I saw one pundit saying a 10% bounce can still happen.
Minor fade on bulls after that surge the prior week from 38.3. Bears fell after finally breaking over 20; at least they held 20. They have converged more than anytime since 2016, but nothing that would suggest extreme. If anything, bears are still extremely low.
Bulls: 45.5 versus 46.7
Bears: 20.4 versus 21.5
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: 45.4 versus 46.7 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: 20.4 versus 21.50 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: 2.895% versus 2.913%. Bonds acting as a bit of a safe haven, working laterally along the 200 day SMA after rallying through that level early week.
Historical: the last sub-2% rate was in November 2016 (1.867%). 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: 1.13049 versus 1.13604. Euro faded on the week but is still in its 2-month lateral range.
Historical: 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 versus 1.14172 versus 1.13308 versus 1.13264 versus 1.13124 versus 1.12348 versus 1.13475 versus 1.1364 versus 1.14329 versus 1.14228 versus 1.14090 versus 1.13881 versus 1.14019 versus 1.13394 versus 1.13455 versus 1.13760 versus 1.14042 versus 1.13757 versus 1.3972 versus 1.14682 versus 1.14626 versus 1.1538
USD/JPY: 113.382 versus 113.634. Slight fade to end the week, holding over the 50 day MA, still in a great pattern to break higher.
Historical: Last below 109 in June 2018: 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: 51.20, -1.38. Still working laterally for the past two weeks, trying to hold over the 50.00 level.
Gold: 1241.40, -6.00. Rallied up near the 200 day SMA, faded the rest of the week to the 10 day EMA. Nice break higher, good test.
MONDAY
SP500 broke 2600 and supposedly that sets up further downside. In the time of algos, beware of breakdowns. Sentiment is rather extreme as reported by the AAIA, outflows from stocks are at a record. From a sentiment standpoint you have to watch for a reversal.
Leadership remains weak, so any reversal from a breakdown, a false break if you were, expectations would be for no more than a rebound within the range.
Right now many people are in no mood to play a rally. Understandable given the selling, and more likely to come even if the Fed backs off after next week's rate hike. At least everyone assumes a rate hike.
The point is: when you feel beat up, when the last thing you want to do is play any upside, when you see the money outflows and feel that is the right move, that is when you really need to consider playing some upside if stocks in quality patterns make solid moves.
What kind? TEAM, WDAY, YUM, SPLK, DOCU, TECD, KDP, VMW, ILMN. They are in position to move higher if the sentiment drives a rally. If not, then we play some more downside along with the plays entered Friday.
Wednesday is FOMC rate hike day. A hike is expected, and if one does not come it is said that would be a shock. Perhaps, perhaps not. Friday is expiration. The Wednesday FOMC meeting and subsequent statement will be Powell's most important as backs away from his hard line stance. Can he dance for the markets? Does he care? We will see.
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