Market Direction: BEARISH alert
issued 8/10/2017
You have probably also noticed sudden strength in both retail and energy stocks amid Tuesday's retreat for equities. Across the energy space, I find it unlikely that WTI crude prices can move beyond $50 a barrel, not to mention $52, which is where they need to be. For that reason, I will probably use this pop to lighten my energy names. As for multi-line retail, you all know that Walmart (WMT) is my favorite by now. Keep an eye on today's Redbook number. That series has been showing real strength of late on a year-over-year basis.
Market Recon...
Pressure
We
did expect to see some profit taking across the equity space on Friday. That
would have made sense in the wake of the re-balancing seen across financial
markets as August came to a close on Thursday. The fact that there was no real
broad taking of said profits at that point was seen as a sentimental positive
for the net long crowd. Over the weekend, geopolitical concerns courtesy of
North Korea's rogue leadership resurfaced. Futures were heavy, and once the
bell rang at 11 Wall Street, stocks were even heavier. This movement coincided
with a dramatic spike in the VIX, further strength in gold, and a compression
in Treasury yields that left the 10-year at levels not seen since the election
last November. By the way, the spread between the yields of two-year and
10-year paper was pressed to a mere 0.78%, and it is trading even flatter, at
0.775% this morning. In other words, not what those long the banks were looking
for.
The
flattening of that yield curve was more than a function of safe-haven seekers.
There were also dovish comments by both Lael Brainard and Neel Kashkari to deal
with. Both of them were already doves coming in. Their comments should not have
surprised anyone. Still, the banks took this one square on the nose. Goldman
Sachs (GS) and Bank of America (BAC)
gave up more than 3%, while Citigroup (C)
and JP Morgan (JPM) surrendered more than 2% on the day. I think
weakness in this group has been long telegraphed, and if you are still wearing
them at this point that you may have to wait for an upwardly moving day for
yields. Problem is that on that day, you won't want to sell them.
Seeing
Treasuries at levels not seen since November, and trying to gain an edge (like
any aggressive kid from the neighborhood might), I threw an Andrews' Pitchfork
model on a chart of the S&P 500 that started with the lows of election
night. Wow. The chart was telling. The model clearly accommodated the sideways
action seen most of the summer, and the extremely recent move higher for the
index. That was not all; the model also displayed the need for 2446 to hold if
indeed tested. Do you know what Tuesday's low of the day was for the S&P
500? That's right, 2446. The level held, for now. The 50-day simple moving
average was indeed in the area, now standing at 2453, but that was not where
the index held. So, what now?
Coiled
Spring
I
believe that there could be further movement to the downside,
but that the northerly trend will prevail. Let me explain. The immediate
threats posed to your portfolio come from our legislature: the budget and the debt ceiling.
These should be short-term threats that come to a satisfactory conclusion after
causing some volatility through headline risk. I want you to think of this as a
coiled spring. What happens when you compress a spring all the way? It either
breaks, or pops, right? Let's just assume that North Korea continues to behave
irresponsibly. I think it's apparent that the leadership there fancy themselves
as the successor to the Soviet Union as the world's evil super power. That has
to be priced in, and that is actually underway. One caveat: not all can be
priced in, either way, regarding tax reform. The finer points of tax reform,
or, should we say, the quality of said tax cuts, are impossible to price in at
this point. That means that you are going to see a likely 100-plus point move
for the S&P 500 at some point, probably within weeks to months.
Let's
go back to our chart of the S&P 500. A 38.2% Fibonacci re-tracement from
the lows of election night through the highs of this summer would leave the
index at 2333. That is how far you can compress this spring before it breaks. A
failure to cut taxes will cause dismay in the marketplace, as well as erosion
in all of our confidence surveys. If, however, the close of September brings us
the removal of the federal budget and the debt ceiling as possible negatives
for headline risk, and markets find reason to believe in tax cuts, there will
be a euphoric response. The extent of that pop could go as high as the 2575
level for the S&P 500. That is where the central trend line of the already
discussed Pitchfork lies. The index is not even close to technically
overbought. Keep that in mind. I don't care about your historical valuations
argument. I do get it, but honestly, I only care about that space where the
rubber meets the road, or where demand and supply collide at any given second
in time. That is called price discovery. That is the only thing that is real.
Stock market ruins.
How
to Defend Yourself
Defense
stocks seem to be the smart play right now, at least to me. I have been long,
and intend to stay long, Lockheed Martin (LMT)
and Raytheon (RTN) , as well as Kratos Defense & Security
Solutions (KTOS) . Now, I know that I have been pounding the table
on KTOS for some time. I want you to tread carefully there. Last night, the
firm announced its intention to issue an additional 12.5 million shares for
sale in a deal underwritten by JP Morgan and Goldman Sachs. This, at least to
my math, amounts a 14.3% dilution event that will likely impact the market
price of the equity Wednesday morning.
$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor
positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we
may issue advising a change in the current market direction. Stay tuned
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The all-time lows since our initial
recommendation to go SHORT
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (8/10/2017)
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Dow
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down 243.67 points a 1.12% gain
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8/21/17
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Nasdaq
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down 39.68 points a 0.64% gain
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8/21/17
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S&P 500
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down 20.86 points a 0.86% gain
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8/21/17
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