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Newsletter

Daily Newsletter, Monday, 3/11/2019

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Rebound!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market rebound strongly from last week's sell-off, a test of the all-time high is now in the sight. Surprisingly, and despite weakness in Dow Component Boeing, the U.S. broad market moves solidly higher. The S&P 500 began moving up from early lows before the opening bell, continued to move higher once the Monday session was started, and remained strong into the close of the day. The question now is if it will stay strong in the face of this week's economic reports, a series of crucial Brexit votes, and unsatisfied need for trade news.


Internally, the market move was strong. Advancing stocks outpaced decliners by more than four to one across most sectors, advancing volume outpaced declining volume by a comparably significant rate. The only figure that could be stronger is the stocks making new highs. Stocks making new highs is outpacing the new lows about 4:1 but less than 80 stocks make new lows. This is OK for now while the S&P 500 is still below the all-time high but I would like to see it improve as the index moves higher.

Market Statistics

The news of the day today is from Boeing. Another of the company's 737 Max-8 jets crashed killing all passengers. This is the second deadly crash involving one of Boeing's most popular jetliners and already sparked concern for the jet's safety. A number of countries have already grounded their fleets including China, Indonesia, and Ethiopia. The black box has already been found so we should know pretty soon the cause of today's crash.

If the cause of the crash turns out to be a flaw in the jet or avionics Boeing could be in for a big downturn. Shares of the stock fell more than -10% in the premarket session and opened with a serious gap to the downside but buyers were ready. The stock saw vigorous buying all day that more than halved the early loss and confirms support at $380. Support looks strong but I don't think that will matter if there is a recall of Boeing's best selling jet.

In the UK, lawmakers are getting ready to vote on Brexit. The vote is on a newly worded version that still does not have broad support. If May loses the vote tomorrow the only recourse she may have is to accept a soft-Brexit that includes acceptance of the EU's Customs Union. Regardless, if tomorrow's vote is lost it will trigger another vote that may make May's decision moot. Parliament will be forced to decide to accept a hard-Brexit or not and both carry consequences. The date for Brexit is two weeks away.

Economic Calendar

The Economy

This is going to be another busy week for economic data. The calendar is full of regularly scheduled reports and augmented by a fair amount of older data delayed by the government shutdown. The most important is probably the CPI scheduled for tomorrow, it is expected to tick higher at the headline and a contender to move the market if the data misses expectation. Hot CPI will naturally cast doubt on the FOMCs decision to pause and how patient they can be while cool data will intensify fears of global slowing.

January Retail Sales, delayed by the shutdown, were much better than expected. Headline retail sales advanced 0.2% versus a consensus 0.0% but the strength was offset by a downward revision to December data. The good news is that December is old data as in last year while January is this year and this year's sales are up 2.3% over last January. At the core level sales are up 3.2% ex-autos and 4.0% ex-autos and gas. The data isn't what I would call robust but it shows solid domestic spending in the face of slowing international economic activity.


Business inventories rose 0.6% over the last month as manufacturers continue catching up with demand. Inventories are up 4.8% over the same time last year and outpacing sales while business keeps an eye on trade developments. Sales fell -1.0% in the last month but are still strong YOY at 2.1%. The Sales to Inventory Ratio ticked higher and is approaching levels associated with well-supplied markets.


Moody's Survey of Business Confidence rebound 1.1 points in the last week. The index is now sitting at 12.3 but still at post-Financial Crisis lows. Mr. Zandi says businesses are anxious about Trade and Brexit with EU markets the weakest. We may see something happen on Brexit this week to reassure businesses but I'm not counting on it. On the trade front we could get anything at any time; the longer it takes for new news the worse it will be for market sentiment.


The first quarter earnings cycle is slowly creeping closer. So far there have been two reports for the quarter but nothing to write home about, both beat EPS estimates and one beat revenue estimates. The consensus estimate for Q1 earnings growth is now -3.4% and it may tick lower. If the quarter actually produces negative growth it will be the first quarter to do so since we exit the last earnings recession 3 years ago, has it really been that long.

All eleven sectors have been revised lower since the start of the quarter as have all four quarters for this year. With that dynamic in play, I find it hard to believe the market will move higher unless it's looking beyond the 1st quarter and believes a trade deal will be made with China.


The good news is that outlook for earnings growth brightens after the first quarter if still overshadowed by falling estimates. Earnings growth is expected to turn positive by the second, barely, and accelerate into 2020. The outlook for 2020 is still creeping higher but I think that is more the effect of the downward revision to 2019 numbers than upward revision to 2020.


The Dollar Index

The Dollar Index extended it's fall from resistance and looks like it will remain range bound for the near-term. The index has confirmed resistance at the $97.50 level where it has failed to move higher several times in the past. The reversal at resistance was sparked by last week's weak NFP figure and may deepen if this week's data is weak too. A move lower may find support at $97 or $96.50, a move up will need to close above $97.70 for me to get bullish now. The next FOMC meeting is only 8 days away, there is little expectation of a policy change in 2019.


The Gold Index

Gold prices are confirming resistance below the short-term moving average at the $1,300 level. This may indicate gold will fall further regardless of the direction the DXY moves. The first target for support is last week's low just above $1,280, a move below that would be bearish. The risk this week is in the inflation data of which we will get a read on CPI and PPI, both of which are expected to strengthen from the prior month. A move higher faces resistance at $1,300, the short-term moving average and an uptrend line. A move above $1,300 may be enough to keep the metal moving sideways near-term.


The Gold Miners ETF GDX is hanging in limbo after rebounding last week. The ETF is above support but in the middle of a trading range that may dominate prices for the foreseeable future. The indicators are consistent with a bounce from support and bullish so a move up in prices looks likely. If the ETF is able to move higher resistance is likely at $23.00 and $23.50, a move lower may find support at the short-term moving average or just below near $21.50.


The Oil Index

WTI moved up today bullish news but the move was capped by the outlook for U.S. production. Bullish news includes a decline in active rigs, -9, over the past week and a reaffirmation of OPEC production cuts from Saudi Arabia. The decline in rig counts is offset by new predictions calling for U.S. production to hit 13.7 million BPD by 2024; the Saudi reaffirmation was far more supportive of prices. The Saudi oil minister says the country stands by OPEC's decision to curb production and that no change in policy should be expected before June. He also says Saudi Arabia will cut back on exports in April to further tighten supply. WTI gained 1.5% on the move but has yet to break out of its consolidation range.


The Oil Index rebounded from Friday's low but the move is pretty weak. The index created a small green candle Bullish Attack Pattern but the indicators are still bearish and the price is still below resistance. Resistance is the short-term moving average near 1,210 and it could be strong. Resistance is reinforced by an uptrend line, the 1,300 level, and the long-term moving average so a break above it would be quite significant. The indicators are bearish but weak so a deep dive in prices does not look likely either, my best guess is the index will move sideways to down until earnings, trade, or OPEC grab the markets attention.


In The News, Story Stocks and Earnings

Shares of Apple got a boost this morning after the company was upgraded by Bank of America. The analysts upped the stock to buy from neutral citing the recent price pullback as an opportunity. They raised the price target to $210 from $180 depending on the long term trajectory of hardware demand. BoA expects to see strength in healthcare, wearables, and services. The company also announced the date of its next major event, March 25th, where it is expected to unveil subscription streaming and news services. Shares of the stock moved up nearly 3.5% and set a new three month high.


Stitch Fix dazzled the retail world by topping analysts wildest estimates. The stock jumped 20% after reporting EBITDA grew over the past year versus an expectation for a deep decline. Active clients increased 18% driving a 25% improvement in revenue; analysts had been expecting about 23.5% top-line growth.


The VIX fell sharply in today's trade to firmly reject higher prices at the long and short-term moving averages. I hate to jinx it but this looks like a fairly strong bullish signal for the market as it points to cheaper prices for options and rapidly fading fears. A move lower may not get far, there are still reasons for caution, but it looks like the market expects the economy to survive the trade war and Brexit.


The Indices

The Dow Jones Industrial fell hard in early premarket action but the move was 100% Boeing. The broad market opened higher and marched higher all day, led by tech. The tech-heavy NASDAQ Composite posted the largest advance with a gain of 2.02%. The index formed a large green candle extending the bounce from a support that began last week. The bounce is trend following and looks strong so is likely to continue higher in the near-term. The risk is the indicators have yet to confirm so sideways action will prevail longer-term. A move up may find resistance at 7,600, a move above that may go as high as 7,800.


The Dow Jones Transportation Average posted the second-largest advance in today's session at 1.93%. the transportation average created a large green candle that extended Friday's bounce and closed above both moving averages. The candle is strong and is supported by the indicators but the signal is still weak so caution is due. A move up may find resistance at 10,500 or near 10,650, a move above that would be bullish.


The S&P 500 posted the third largest advance at 1.46%. The broad market index created a large green candle extending a move above support and the short-term moving average. The indicators are bearish but show signs of support at this level so the index may continue higher; a move up may find resistance at 2,800 or 2,820.


The Dow Jones Industrial Average lagged today's market with a gain of only 0.78%. The blue-chip index created a large green candle that closed at the top of the session and strong. The move looks like it could be the beginning of another rally in prices but there is some risk. The indicators are rolling into what may become a bullish signal but have yet to confirm the move and there is a target for strong resistance at the 26,000 level. A move to that level may be part of a consolidation or reversal pattern so I would not get bullish without a close above 26,000.


The indices touched support last Friday and have unleashed a round of buying. Today's candles look strong but they aren't supported by anything constructive I can think of save hope for the future so I am skeptical. There is a lot of data due out this week and any of it could move the market. Next week is the FOMC meeting and it could move the market too. Longer-term, earnings outlook is deteriorating and that is a weight I think the market can't bear, or won't bear, too long. I am firmly bullish for the long-term but I don't think the secular-level market consolidation and sector rotation is over. I am neutral for the near-term.

Until then, remember the trend!

Thomas Hughes


New Plays

30 Stocks

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Dow is an index of 30 stocks and that was never more apparent than today. Boeing was down -56 points at the low to erase -394 Dow points but the dip was bought. The other Dow stocks posted strong rallies to lift up their stricken brother and overcome the morning disaster. The Dow futures were down -304 just before the open but the other stocks were surging on left over short covering from the squeeze at Friday's close. This show of strength, when the Dow could have imploded, suggests great market sentiment under the surface. The 2.5% decline from last week was just enough to pull traders back into the market. Assuming we are not killed by some errant headline on Tuesday, this rally should continue.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Great Recovery

by Jim Brown

Click here to email Jim Brown