Stocks rallied on Friday, and as we talked about last week, Fridays have been consistently good this year, and I wonder if its all about investors afraid of there being some kind of trade deal made over the weekend, and not wanting want to miss out on a Monday rally? On the other hand Mondays (or Tues. if Mon. was a holiday) have performed poorly overall this year, and that would make sense with each weekend passing by without a trade deal. The Dow gained 181-points and once again the buying intensified into the close.
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[TD][/TD]
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[/TD]
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2019 has started about as well as any year ever has and one of the main reasons for that is that it has been correcting what now looks like an overreaction to a plethora of bad news for the market in late 2018. Remember the Fed was raising rates and talking about 3 or 4 more rate hikes in 2019? Or the 25% tariff proposal before the temporary deal was made? How about the fact that companies were giving earnings warnings and estimates were dropping to the point where they are expecting negative S&P 500 earnings for the first quarter of 2019? And of course weakening economic data showing a slowdown in global growth?
Fast forward a couple of months and the Fed has put itself on hold for now, changing to a "data dependant" approach. We got that 90-day tariff deal that moved some tariffs on the Chinese to 10%, instead of the proposed 25%. The earnings are still an an issue but it seems like investors are going all-in, to use a poker term, banking on a trade deal that will help those earnings in futures quarters.
The sell-off in December was pricing in the higher tariffs and erasing those losses is just bring the market to where it was to start December of 2018. Now the question becomes, do we see the market continue to skyrocket if a deal is made, or is it pricing in that trade deal now which could trigger a sell the news reaction?
This S&P 500 chart shows the trajectory that the market was on going back to the 2016 election. We had that amazing run from November 2017 into January of 2018. The S&P shot out of the rising channel in late 2017 putting an exclamation point on the rally, and clearly it was extended, but it wasn't until the President started to talk about trade and tariffs more seriously in early 2018 that investors saw the potential downfall to many global company's earnings. That was at point #1 on the chart where we saw that steep decline.
That sell-off pushed the S&P back into the channel and even below it, to which point the channel had to be extended downward. It bounced back in a choppy fashion for several months before moving back above the top of the channel again in September 2018 where we saw new highs being made (point #2). That's when the Fed started to get more hawkish and earnings estimates stared to come down, and so did the price of stocks. By the end of October it had broken below the bottom of the channel at point #3.
A couple of choppy months later, a few failed attempts to recapture the channel, and the S&P finally collapsed in December 2018, falling to the lows we saw at point #4 during the normally strong days two days surrounding Christmas, of all times.
Since that severe sell-off the S&P has come roaring back with only minor wrinkles along the way, but there was one more major sell-off on January 3rd when Apple gave their earnings warning blaming it on the tariffs. It is a blip on that 2+ year chart but it seemed to be the capitulation from the bulls completely giving up and the Dow was down 660-points on that day.
Since that capitulation day we've had record rallies from the commutation of the more dovish Fed, the optimistic trade negotiations which, if is resolved in a positive manner actually does reverse the negative earnings expectations, but we do still have some issues with economic growth, although the U.S. economy is better off than many European economies so it has been somewhat insulated from the global slowdown.
So that's the story as I see it. Any positive conclusion to the trade negotiates could send stocks soaring even more so the FOMO (fear of missing out) is palpable, but there's also chance of a sell-the-news reaction the more investors price in a deal being made. Getting back into that channel is the next obstacle, and perhaps a trade deal can do that. But there's is also a chance that the bottom of that channel is going to act as resistance and this was all just a big rally within what may turn out to be the start of a new leg down after the channel breakdown at point #3 last October.
I think the S&P 500 chart above is enough for today. Basically every U.S. stock index chart is in a similar situation: They've come a long way since the Christmas lows. They are extended but the fear of missing a trade deal rally has investors not only holding on, but continuing to buy.
The interesting charts are in safety plays. In general, but obviously not always, when stocks are rallying investors are more likely to sell bonds and move into stocks. The opposite is also true in that investors will move money into bonds when stocks are selling off. Stocks have obviously been rallying at a record pace yet look at the bond market. This AAG is at an all-time high.
That means bond yields are falling. And why would yields fall? I'm not an expect economist by any means, but I know yields tend to go down when the economy is slowing or when inflation is not an issue. If the economy was soaring the Fed would be raising rates to put the breaks on inflation, yields would more likely be moving higher, but there's nothing like that going on now.
And gold, which is another safe haven for investors and usually a good option when stocks are falling, has been making new highs recently, and if it can get close to 1400, it would be at a 5-year high. Gold tends to go up during inflationary periods, which again, the bond market is far from suggesting. Gold also gets a boost when the dollar is falling, but the dollar has been rallying for the last year. Again, I'm not an expert and there may be a very good reason for this, but all this seems odd to me.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
2019 has started about as well as any year ever has and one of the main reasons for that is that it has been correcting what now looks like an overreaction to a plethora of bad news for the market in late 2018. Remember the Fed was raising rates and talking about 3 or 4 more rate hikes in 2019? Or the 25% tariff proposal before the temporary deal was made? How about the fact that companies were giving earnings warnings and estimates were dropping to the point where they are expecting negative S&P 500 earnings for the first quarter of 2019? And of course weakening economic data showing a slowdown in global growth?
Fast forward a couple of months and the Fed has put itself on hold for now, changing to a "data dependant" approach. We got that 90-day tariff deal that moved some tariffs on the Chinese to 10%, instead of the proposed 25%. The earnings are still an an issue but it seems like investors are going all-in, to use a poker term, banking on a trade deal that will help those earnings in futures quarters.
The sell-off in December was pricing in the higher tariffs and erasing those losses is just bring the market to where it was to start December of 2018. Now the question becomes, do we see the market continue to skyrocket if a deal is made, or is it pricing in that trade deal now which could trigger a sell the news reaction?
This S&P 500 chart shows the trajectory that the market was on going back to the 2016 election. We had that amazing run from November 2017 into January of 2018. The S&P shot out of the rising channel in late 2017 putting an exclamation point on the rally, and clearly it was extended, but it wasn't until the President started to talk about trade and tariffs more seriously in early 2018 that investors saw the potential downfall to many global company's earnings. That was at point #1 on the chart where we saw that steep decline.
That sell-off pushed the S&P back into the channel and even below it, to which point the channel had to be extended downward. It bounced back in a choppy fashion for several months before moving back above the top of the channel again in September 2018 where we saw new highs being made (point #2). That's when the Fed started to get more hawkish and earnings estimates stared to come down, and so did the price of stocks. By the end of October it had broken below the bottom of the channel at point #3.
A couple of choppy months later, a few failed attempts to recapture the channel, and the S&P finally collapsed in December 2018, falling to the lows we saw at point #4 during the normally strong days two days surrounding Christmas, of all times.
Since that severe sell-off the S&P has come roaring back with only minor wrinkles along the way, but there was one more major sell-off on January 3rd when Apple gave their earnings warning blaming it on the tariffs. It is a blip on that 2+ year chart but it seemed to be the capitulation from the bulls completely giving up and the Dow was down 660-points on that day.
Since that capitulation day we've had record rallies from the commutation of the more dovish Fed, the optimistic trade negotiations which, if is resolved in a positive manner actually does reverse the negative earnings expectations, but we do still have some issues with economic growth, although the U.S. economy is better off than many European economies so it has been somewhat insulated from the global slowdown.
So that's the story as I see it. Any positive conclusion to the trade negotiates could send stocks soaring even more so the FOMO (fear of missing out) is palpable, but there's also chance of a sell-the-news reaction the more investors price in a deal being made. Getting back into that channel is the next obstacle, and perhaps a trade deal can do that. But there's is also a chance that the bottom of that channel is going to act as resistance and this was all just a big rally within what may turn out to be the start of a new leg down after the channel breakdown at point #3 last October.
I think the S&P 500 chart above is enough for today. Basically every U.S. stock index chart is in a similar situation: They've come a long way since the Christmas lows. They are extended but the fear of missing a trade deal rally has investors not only holding on, but continuing to buy.
The interesting charts are in safety plays. In general, but obviously not always, when stocks are rallying investors are more likely to sell bonds and move into stocks. The opposite is also true in that investors will move money into bonds when stocks are selling off. Stocks have obviously been rallying at a record pace yet look at the bond market. This AAG is at an all-time high.
That means bond yields are falling. And why would yields fall? I'm not an expect economist by any means, but I know yields tend to go down when the economy is slowing or when inflation is not an issue. If the economy was soaring the Fed would be raising rates to put the breaks on inflation, yields would more likely be moving higher, but there's nothing like that going on now.
And gold, which is another safe haven for investors and usually a good option when stocks are falling, has been making new highs recently, and if it can get close to 1400, it would be at a 5-year high. Gold tends to go up during inflationary periods, which again, the bond market is far from suggesting. Gold also gets a boost when the dollar is falling, but the dollar has been rallying for the last year. Again, I'm not an expert and there may be a very good reason for this, but all this seems odd to me.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
