Market Direction Week of November 25, 2019: Black Friday

Market Direction: BULLISH alert issued 10/24/2019



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Market Direction Week Review: U.S. stocks took a breather last week, declining modestly, after six consecutive weeks of advances. Volatility remained low, but mixed. U.S./China trade headlines left investors wondering whether a "Phase 1" trade deal can be signed before year-end. On the economic front, the preliminary U.S. Purchasing Managers' Index for November showed improvement in economic activity, which supports our view that the worst of the manufacturing slowdown may have passed.

About 6 weeks ago (11/11) President Trump said that the US and China had reached an interim trade deal that would be officially signed in November. A few weeks later, that date was pushed out to early-December. This week, equity markets were rocked mid-day Wednesday (11/20) following a report that the deal might not be even get done this year. The latest postponement came following the Chinese condemnation of a U.S. Senate resolution supporting human rights in Hong Kong (details below). 

While the phase-one deal initially seemed to be mostly “low-hanging fruit”, it is now clear that large differences remain as the US wants China to commit to agriculture purchases in specific dollar amounts, and China wants the US to lift some tariffs that are already in place; neither are willing to budge. With new tariffs on $156B in consumer goods scheduled to take effect on December 15^th a postponement beyond that date could spoil any potential for a year-end (Santa Claus) rally.

After 5 months of violent protests in Hong Kong, and following the passage of a similar bill in the US House last month, the US Senate passed a bill called the "Hong Kong Bill of Rights on Human Rights and Democracy” on Tuesday (11/19). As usual, the House and Senate bills must be reconciled before the measure can be sent to the President for his signature, and that is not a foregone conclusion given his near-silence on the issue and the threat it poses to trade negotiations. Senate Majority Leader Mitch McConnell has urged President Trump to voice his support for the protesters in Hong Kong, but he has thus far refused to do so. 

The Chinese government strongly condemned the bill saying among other things that it, “disregards the facts, confuses right and wrong, violates axioms, plays with double standards, seriously violates the basic norms of international law and international relations, and openly intervenes in Hong Kong affairs”. China also said it would take measures to prevent the bill from becoming a law, and if the US is willing to go its own way, China will counteract and firmly safeguard national sovereignty, security, and development interests.

Following an increase in confidence about global growth, international equities actually outperformed US equities in the months of September and October, attracting attention from US investors. Here are a few of the potential catalysts for this recent change in sentiment:

• Improving manufacturing PMIs (Purchasing Manager Indices), implying that the worst may be over
• Reduced likelihood of a no-deal Brexit, or at least a continued postponement
• Optimism about the prospects for a phase-one trade deal between the US and China
• Though this deal is now in jeopardy (see above)
• 3 interest rate cuts by the Fed this year, which has lifted emerging market economies by weakening the dollar
• International markets relative attractiveness due to lower valuations
• The SPX has a forward P/E of about 18 versus just 13 for many foreign markets
• Up about 25% YTD, the S&P 500 is also a bit overbought technically
• The ECB (European Central Bank) is still in quantitative easing mode versus neutral for the US Fed

How the market finished last week, the S&P 500 down 0.3%, the Nasdaq down 0.2%, and the Dow down 0.5%.

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Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bullish Alert recently started on 9/5/19 and we suggested to our followers they can trade any new long positions based on are model. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in an uptrend (see Market Direction Mid Week Update: Trading Strategies). 

Q3 earnings season is nearly over now. With 476 companies (95%) of the S&P 500 reporting, 79% have beaten estimates.

The unusual levels of complacency and uncertainty, are two perspectives that can’t easily coexist. With new tariffs scheduled to take effect on December 15th and still no phase-one trade deal imminent, I believe markets remain quite vulnerable to a pullback on any negative news; especially trade-related news.

It will be a shortened trading week with U.S. markets closed on Thursday in observance of the Thanksgiving holiday. Markets will close at 1 p.m. on Friday.

Investors will be monitoring the U.S.-China trade war, consumer confidence and Black Friday in the week ahead.

Both the U.S. and China have expressed a willingness to come to a “phase one” trade deal; however, the two have not yet signed any agreement. While some reports have suggested that a phase one trade deal is unlikely to come to fruition this year, President Trump told Fox News on Friday that the two feuding nations were “potentially very close” to a trade deal.

Wall Street isn’t convinced that a trade deal could be imminent. “Mixed reports this week about the prospects of a Phase I trade deal took some of the steam out of the recent market rally,” Wells Fargo wrote in a note to clients Friday. “We continue to expect a stalemate, while recognizing the significant downside risks of a deterioration in trade negotiations.” Wells Fargo noted that it still expects the additional tariffs to go into effect December 15.

Meanwhile, the consumer will be in focus this week. The Conference Board’s consumer confidence reading for November will be released Tuesday. Economists polled by Bloomberg expect consumer confidence to jump to 127.0 during the month, up from the 125.9 in October.

“A new high in the stock market, solid employment data, and declines in gasoline prices should boost consumer optimism,” Credit Suisse said in a note Thursday. “Consumers have been resilient throughout the trade conflict, as confidence has remained high in a tight range for the past year, a stark comparison to the sharp deterioration in business optimism.”

The holiday shopping season is well underway. According to a recent survey by the National Retail Federation (NRF), well over 56% of consumers started their holiday shopping during the first week of November. Nevertheless, Black Friday kicks off the busiest shopping weekend of the year and this year is no exception. The NRF estimated that 165.3 million people are expected to shop Thanksgiving Day through Cyber Monday. 114 million of those consumers are planning to shop on Black Friday.

Economic Calendar: Personal Income and Spending (11/27), GDP (11/27), Durable Goods (11/27),

  
Some of the major earnings announcements on deck: PANW, BURL, VEEV, VMW, DE.

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