Opposing Opinions From Market Strategists As The Ides Of March Loom

It was a tumultuous day in the market Monday, even as the framework for a U.S./China trade deal appears to be coming together. Negotiations are in the “final stages” as the two sides plan a summit for the end of March at Mar-a-Lago, President Donald Trump’s Florida resort, sources told CNBC. If a deal is reached, the U.S. could roll back tariffs on at least $200 billion in Chinese goods while China could remove or cut industry-specific levies like those on autos.

China’s National People’s Congress is also expected to pass a new foreign investment law that would change equity ownership rules, and potentially have language about state-owned enterprise subsidies and forced tech transfers.

The headlines from Sunday afternoon spilled over into the markets on Monday morning but failed to maintain positive momentum for equities. All 3 major averages ran higher out of the gate on Monday but gave up all their gains before noon and the selling pressure reached its peak around 1:00 p.m. EST and before buyers stepped in. At its lows of the day, the Dow was down greater than 400 points. The S&P 500 was down some 36 points at its lows of the day and completed the weekly expected move in the 1st trading day of the week. The weekly expected move is $33/points as depicted in the screenshot below:

By the end of the day, the major averages cut their losses substantially, but still finished in the red. So what happened? Was it construction data spending that rose just 4.1% in 2018, the U.S. Census said Monday? Unfortunately, the annual bump in construction spending wasn’t enough to shield investors from the sharp decline of 0.6% in December 2018. Having said that, it’s doubtful that construction spending was what ailed the markets on Monday. After all, the Homebuilders ETF (XHB) was higher on the day. So what was it that proved to drag on markets Monday?

Two weeks ago, Finom Group (for whom I am employed) wrote the following to subscribers and it identified one of the main cogs in the 10-week market rally, Boeing (BA ).

As we discussed with members, Boeing is a price-weighted instrument within the price-weighted Dow Jones Industrial Average and the most heavily weighted at that. Big institutions have used the instrument to arbitrage the market by targeting it and triggering other algorithmic programs. Since this reporting, CNBC and other networks have picked up on this game of institutional arbitrage. (Photograph from MarketWatch)

It’s one thing to suggest the media is coming around to the aforementioned understanding of 2019’s market driver being Boeing, but here is an article from Bespoke Investment Group that suggest very much what we’ve offered in the past.

“With a gain of over 50% from its late 2018 low and a YTD gain of over 36% through last Friday’s close, it has been one of the strongest starts to a year (through 3/1) for a current DJIA component in decades.

Making its move even more noteworthy is that with a share price of more than $400 and the fact that the Dow is a price-weighted index where each component’s weighting in the index is based on its share price, BA’s rally has had a ‘jumbo’ impact on the overall index.BA’s weight in the DJIA currently stands at 11.5%, while its weighting in the S&P 500, which is a market cap weighted index, is less than 1%. As a result, through Friday’s close, the DJIA had gained 2,807 points so far in 2019 and BA accounted for 812 of them. That works out to 29% of the DJIA’s entire gain this year! Without BA’s rally, the DJIA would only be up about 8% this year versus its 11.5% gain through Friday. Behind BA, the next closest stock in terms of its impact on the DJIA this year has been Goldman Sachs (GS), which has accounted for 216 points of the DJIA’s YTD gain (7.7%).” 

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