The Uptrend Is Weakening

The rally since the Presidential election has finally started to show its age. Sentiment is at extreme highs and there are technical signals that a moderate correction is at hand. How much? We can look to the prior correction of 6% from last spring/summer that lasted about eight weeks as a proxy (more in the chart section below). Markets tend to correct when sentiment is at highs and we are certainly at that point according to the chart below.

You may have read that the Dow has had several up days in a row which is highly unusual. In fact, the Dow had 12 consecutive days (2/9 thru 2/27) where it closed higher which is telling as this type of streak is not randomly distributed, according to the analysts at Elliott Wave International. In fact, there have been only two longer consecutive closing streaks in the index’s entire 121-year history: the first 13 days of January 1987 and a 14-day stretch in June 1897. These streaks are typically seen in the following circumstances:

1. At the start of market rallies after pessimism has reached an extreme at the low of a market – think 2009.
2. In the middle of a strong uptrend where prices break higher overnight – such as the 2013 uptrend where stocks were up 30%+.
3. Or, they occur at or near the end of strong rallies where we see exhaustion gaps – which may have occurred last week.

This doesn’t indicate “The Big One” is about to happen but it is a sign that the rally is tired and a correction of some sort is needed to have a healthy advance for the remainder of 2017. I expect a new uptrend to be established after the next correction which should establish new highs and the potential for the bull market to end but that is a discussion for later in 2017. Until then, we take what the market gives us and for now that signal is a yellow light.

Economic & Central Banking Snippets

• As of September 2016, total global debt rose to a record high of $217 trillion, or 325% of world-wide GDP, which was also a record. Remember, this is more debt than we saw prior to the financial crisis and these levels of debt exclude the trillions of outstanding derivative exposure at the banks. We can thank ultra-low interest rates around the globe for perpetuating the creation of more debt than at any time in modern history. (Elliott Wave International)
• Janet Yellen has given the Federal Reserve’s strongest signal yet that it is on the cusp of lifting rates again, predicting that the pace of tightening is likely to accelerate as it seeks to prevent the US from overheating.
• A forward-looking indicator of US home sales unexpectedly dropped last month as leaner inventory and higher home prices and mortgage rates kept home buyers at bay. Pending home sales, or signed contracts to buy previously-owned homes, fell 2.8% in January from the previous month when it rose 0.8%. (FT)
• Israel’s currency has hit its strongest level in more than two years after the country’s central bank held interest rates unchanged (0.1%). The central bank reiterated that the currency’s strength is weighing on exports.
• Durable goods orders climbed by 1.8% last month, however, excluding the volatile transportation component that can distort the reading, orders were down by 0.2%. Meanwhile, non-defense capital goods orders, which is seen as a proxy for business investment, dropped by 0.4%. That represented the biggest fall since September and underscores concerns that the markets may have become too optimistic in its outlook for the US economy.
• Consumer Confidence showed its highest reading since 2001 as February came in at 114.1.
• The Richmond Fed and Chicago PMI surveys were as strong as the Empire State, Philly Fed, Kansas City Fed, and Dallas Fed surveys to show broadly strong growth in manufacturing activity across the country in February.
• The Q4 reading for GDP came in weaker than expected at an unchanged 1.9%. Early estimates from some of the economists I follow are tracking Q1 GDP at just under 1% (not so great).
• Activity in South Korea’s manufacturing sector contracted for a seventh consecutive month in February as both domestic and external demand remained weak. (FT)
• Canadian economic growth came in at an annualized pace of 2.6% in Q4.
• Spain’s economy expanded by an annual rate of 3.2% in Q4, confirming the country’s position as one of the fastest-growing economies in the eurozone. (FT)
• Core inflation has returned to Japan for the first time since 2015, with consumer prices rising 0.1% in January over the same month a year earlier. The return to positive territory was driven by energy as gas prices jumped 9.2% after big drops in 2016. (FT)
• Construction spending fell 1.0% in January as there was severe weakness in government spending.
• Another in a run of significant upside surprises in the ISM that confirmed broad gains across all the major regional surveys, with almost every manufacturing sector reporting growth. The composite ISM index rose another 1.7 points in February to 57.7. Growth was unusually broadly based, with 17 of 18 manufacturing sectors reporting growth in February.
• Next week’s reports will be highlighted by monthly payrolls, factory orders and export/import prices.

The Trump T(i)rade

• Mexico’s peso surged 2.5% to its highest level since the day after Donald Trump’s election victory after Commerce Secretary, Wilbur Ross, discussed in an interview a more conciliatory approach to relations between the two nations. Ross mentioned the possibility of working with its neighbor to stabilize its currency.
• Luis Videgaray, Mexico’s foreign-affairs secretary, and Rex Tillerson, the US Secretary of State, said on Thursday that they are committed to opening a dialogue in the coming months on immigration and trade, as they attempt to smooth over some of the disagreements due to the Trump administration. The officials struck a broadly diplomatic tone in remarks following their first meeting in Mexico City.
• President Trump will target a federal coal mining ban and an initiative forcing states to cut carbon emissions. The Trump administration could begin the process of killing these regulations by having the EPA ask the courts to return it to the agency for review. In addition, Trump could reverse the coal mining ban by asking the Department of Interior to resume its leasing program.
• Mexico’s Economy Minister traveled to Detroit this week to meet with executives from Ford and General Motors to discuss the state of U.S.- Mexico trade and the future of the NAFTA. On Tuesday, Foreign Minister Luis Videgaray said Mexico would only stay in NAFTA if it suited Mexico, and he rejected the imposition of any tariffs or quotas. (Stratfor)
• The White House’s resolve to dismantle the Dodd-Frank Act appears to be wavering, with President Donald Trump not mentioning it in his policy speech this week and lawmakers said to be searching for a suitable replacement.

Chart Time!

Volume and advance/decline measures show fewer stocks are pushing the broader indices higher. That means the recent advance higher is becoming more fragile. More evidence to the notion of a looming correction. Now on to a few charts (all comments in the charts):

Market Snippets

• About 25% of car loans are subprime, and with 75% of them held by car makers and dealers themselves, they are clearly in a position to affect the U.S. economy. After delinquency rates rose 13% in 2016, the demand for new cars slumped dramatically in January of this year, as shown on the bottom chart to the right. “Across dealer lots, inventory is piling up,” said Bloomberg on Tuesday. For the first time in 37 years, a New Jersey car dealer needed to rent extra space to store his unsold Hondas. With inventories high and rising, all those easily repossessed cars will only add to the car industry’s burden. (Elliott Wave International)

• There is $1.3 trillion outstanding in student loan debt thanks to the Department of Education (DOE). To keep that in perspective, that is more debt than outstanding in the auto loan sector. Just one very large difference, these student loans have much higher delinquency (default) rates coming in at 11.2% as of Q4 2016! According to the DOE, borrowers are defaulting on their federal student loans within the first three years of the loans coming due for payments. Political pressure to simply forgive these obligations reveals the potential for a deflationary blow to the economy. (Elliott Wave International)
• Tesla Inc. (TSLA) is months away from product launches that could revolutionize several industries. The most anticipated—the Model 3 electric car—is to be accompanied in 2017 by the unveiling of an electric semitrailer truck, autonomous driving capabilities, and a ride-hailing network. All talk? We shall see…
• Sony released sales figures for its virtual reality system, PlayStation VR, showing the total at the 1mm mark after its launch in October.
• JC Penney on Friday announced plans to shutter between 130-140 stores in the coming months as it focuses on competing with online rivals amid a downturn in department store sales. JC Penny also recorded its first annual profit since 2010.
• YouTube (Google) is said to have exceeded 1Billion hours per day which represents 10x growth levels than in 2012 when algorithms were constructed to provide users with personalized video lineups in order to increase viewing retention. The 1Billion figure is approaching the estimated 1.25Billion of TV hours per day of live and recorded content.
• Wells Fargo said on Wednesday that eight senior executives – including its chief executive and its chief financial officer – will not receive cash bonuses for 2016 in the wake of the bank’s sham accounts scandal.
• Shares in Snapchat opened at $24 on Thursday giving it a market valuation of $27.8B! They lost $515mm last year and issued the shares with no voting rights. Happy 1999!
• SolarCity, which was acquired by Tesla at the end of last year, slashed nearly 20% of its staff in 2016 to 12,243 employees, as it sought to preserve cash amid slowing growth in the rooftop solar industry.
• Spotify recorded a major milestone of 50mm paying subscribers. That means the music streaming service gained 20M users in a single year, and has more than twice the audience size of Apple Music. Spotify is considering a potential U.S. stock market listing in 2017. (FT)

International Snippets

• According to the American Enterprise Institute, Italian living standards are down 10% from 2007. Meanwhile, debt has grown so large that 5.5% of Italy’s economic output goes to paying interest on their sovereign debt! Only Greece pays out more, at 6.1% for the Euro block. Almost 20% of loans in the Italian banking system are in delinquency. This is a problem for all of Europe, as Italy’s $2.5 trillion in government debt is held inside the EU’s shaky banking system. (EWI International)
• Nigeria’s economy suffered its first annual contraction in 25 years as growth in Africa’s top oil producer shrank for the fourth consecutive quarter. The west Africa nation fell into a technical recession in the first half of the year as its finances were hit by low oil prices and declining crude output following militant attacks on pipelines in the Niger delta region. (Stratfor)