Market Briefing For Monday, Oct. 28
Triumphant or not, with regard to securing a solid China trade deal; it was pretty obvious President Trump wants to see market sustainability; or at least stability. We've often said that's one reason not to 'press the downside', as we persistently suggested there will be no catastrophic plunge, even while open-minded to shakeouts or corrections.
(Relates to offshore loans and involvement of big US banks.)
This matters, because regardless of the achievement of nominal record S&P highs, the broad market is far more neutral than that, and 'swings' by individual stocks reflect perhaps excessive expectations from those who try following short-term trends. A China deal could broaden small company participation with sighs of relief.
But meanwhile Friday was an example of not pressing downside(s), when I mentioned a lower open in Amazon would likely see a rebound and hence one cannot (or should not) respond to an earnings miss with a sale or short into weakness. This coming week can be choppier too, with an FOMC meeting and a lot of focused earnings reports on-tap.
Keep in mind (on AMZN) we saw it as a sale when it hit 2000; we we'd not only deferred celebrating with those trying to rationalize the upside; we urged selling (or even shorting) for a fade. These are not very liquid markets, and that's part of it too. Incidentally, as to antitrust potentially breaking it up down-the-road; those parts (especially AWS) might be worth more than the whole; so yes a time may come that we find it very attractive; but not at these levels.
Amazon is is just one example of the type of air-pockets you can get with FANG+ (type) misses this year. And it didn't start this month; it was the characteristic in the Spring purge too; and of course a year ago when we also called the Fall crash. By the way Microsoft late Friday won a huge Pentagon contract over Amazon Web Services.
In-sum: this year we don't have a Fall collapse (at least not so far) and that's fine. We suspected that our indicated low into Christmas 2018, in the best case (developing so far), could be a 'cycle low' relating to tops in the market starting with our 'crash alert' before the late January's hit in 2018; and again a second 'crash alert' at the September 2018 high.
That matters too, because the drive down nearly a year ago could well prove to have been the cycle low we speculated about last Christmas, as we called for a rebound into 2019. If that's so, then while 'yes', we'd be remiss not to notice that some sort of retreat follows almost all S&P probes to new highs, even if the primary uptrend remains intact.
That's a reason why we wouldn't be surprised (especially if S&P spikes higher in the immediate wake of any finalized China trade deal), that a shakeout would be seen, yes still this year. But it also contends that we would not be at a moment where the overall cycle ends. In fact it could well avoid the 'vacuums' under the market (the intermediate or worse bearish cases) we've referenced, and keep the cycle from last winter alive, if sputtering at times, or generally uninspiring for value seekers.
Bottom-line: I don't dispute that markets are extended and that ideally after new highs and a China deal, we could get a shakeout. I also don't dispute the idea that there are numerous bubbles out there. What I do dispute is that those bubbles must burst now; it could be two years or more from now (and some of that may have political influences as we'd outlined, but about which speculation is somewhat premature).
Back to Friday: Favorable trade progress was along lines suggested of Kudlow having the President's ear more than Navarro; who persists on a quest for IP measures to be included in any Phase 1 China Deal. I'm not disagreeing that they should be; just realizing the expedience tends to wear-down demands, and both Xi and Trump want a deal done. It's why I thought Kudlow's milder approach would probably prevail.
I have pointed this out also for months; not because complacency is so omnipresent (it's not exactly that); but because TINA prevails until that is no longer the case. And yes the credit markets are among 'bubbles' out there; but we are not at a point for that to crater dramatically.
We do have an FOMC meeting coming besides key earnings flowing. I wouldn't be surprised if the Fed removes its statement about continued 'accommodation'; so that 'if' they cut the Funds rate again; they may be able to temper that a bit by inferring this won't persist much longer.
If you look at Europe, where ECB policies devastated bank earnings at the same time it also punished savers and retirees (while compelling all wise citizens to engage in more saving than spending; opposite what of course the ECB intended); one can see why Christine Lagarde has her work cut-out for her; and why she's properly discussing (we bet) how a gentle (if they can do it more subtly) emergence from overly-expansive (as thus counterproductive when applied for too long) can be removed without triggering 'withdrawal' symptoms that are worse than disease.
I do believe that NIRP (negative interest rate policies) and further ease here are indeed counterproductive, and hence if the Fed does remove that statement (whether rates are cut or not), it might hint a forthcoming mitigation of such overly-expansive policies here and in Europe too.