As I wrote about in last week’s newsletter – Aloha, Volatility! – there was good evidence a bottom may have been in the making and we saw evidence of that this week. One of the better weeks in the history of the stock market but there is still a lot of doubt from many market participants about the bull market and its ability to continue higher from the 2009 low. So, let’s take a look at an updated daily chart of the S&P 500 ETF (Ticker: SPY) below, to see what happened this week (each bar or candlestick, is one day):
Watching the market this week, I can say it went as good as expected as volatility fell dramatically from 52 to 17.5 and the rally was broad based. There are a few scenarios that can play out from a “V” recovery to being rangebound for several weeks but I doubt the uber pessimistic scenario of the bull market topping is in play.
Topping is a process that takes many months combined with deteriorating economic conditions and that is not happening right now. Earnings season is closing and overall the results were pretty good. The economic data does point to higher inflation and interest rates which is normal when growth expectations shift to higher levels of GDP. Let’s re-visit the chart of 10 year treasury yields to see if there is any cause for concern:
The spike in 10 year yields certainly spooked the stock market the first week of February but you can see that things settled down which probably helped stocks get their footing this week. It is likely we see a 3% handle on the 10 year but in a more gradual manner. I expect that the stock market will wrestle with interest rates and inflation for most of 2017.
So, what to do about next week? We have a holiday on Monday so it will be a shortened week which are typically quiet so I’m not expecting a large reversal next week. Given the chart patterns, we should get a good read on Tuesday morning of what lies next. A move higher or just sideways (consolidation) from the S&P 500 would increase the odds that a bottom has formed but a pullback of 1-2% on Tuesday would give some credence that it was time to raise cash, hedge, rotate, turn, parry, guard…never-mind, just ask this guy HERE.
Chart of the Week!
The US Census Bureau regularly publishes data on international trade for each state’s material goods. Below is the biggest imported good by total 2016 dollar value in each state and Washington DC:
Economic & Central Banking Snippets
- British inflation held to its highest level in nearly six years in January, running at an annual rate of 3%. Inflation has surged in the U.K. since the Brexit decision in June 2016, which hammered the value of the pound and pushed up the cost of imports. (FT)
- Japan’s economic expansion continued in Q4 to mark the eighth consecutive quarter of growth and the longest streak since a 12-quarter stretch that ended in 1989.
- U.S. consumer prices rose more than expected in January, a further sign inflation is firming after a long run of softness. The consumer-price index, which measures what Americans pay for everything from salad dressing to fares on public transportation, rose 0.5% in January after rising a seasonally adjusted 0.2% in December, the Labor Department said. In the 12 months to January, overall prices rose 2.1%, matching the same annual increase as in December.
- The eurozone economy maintained its robust growth at the end of last year, setting the stage for another solid performance in 2018 that may influence ECB policymakers into winding down unprecedented stimulus. Gross domestic product increased at an annualized 2.7% in Q4, resulting in a GDP expansion of 2.5% for 2017. (FT)
- The rate of US new home construction rebounded by the most in more than a year in January, reversing the decline seen in the previous month. New housing starts rose 9.7% to an annualised rate of 1.326m, the US Census Bureau said on Friday — the sharpest increase since December 2016. Despite strength in the US job market and firming wages, housing activity has been curtailed by a tight supply of homes for sale. Meanwhile, permits to build new homes jumped 7.4% in January to an annualised pace of 1.396m, topping expectations. (MS/FT)
Macro Snippets
- Uber’s adjusted loss during the fourth quarter of last year narrowed to $741m, while the company’s revenues from its transportation service reached a record high of $2.2B, up 61% from the same time a year ago. Uber’s gross bookings, which reflects the total value of transactions on its apps, reached $11.1bn in the quarter, up 14% from the third quarter, according to the company. (FT)
- Streaming live TV from the internet works far more reliably now than it used to. Between the five big names in the space–YouTube TV, Hulu, PlayStation Vue, DirecTV Now and Sling TV–you can get everything from a $20-a-month bare-bones replacement to a $75 option that almost resembles your cable lineup. (WSJ)
- Electric car sales since 2012. Electric cars are great but they utilize cobalt and lithium for their batteries which are not as plentiful as gasoline (not even close). Is there enough Lithium and cobalt to support the demand for electric vehicles? (Bloomberg)
- BMW is on the verge of signing a landmark deal for the long-term supply of battery metals lithium and cobalt, as it moves to secure raw materials for its push into electric vehicles over the next decade. The German carmaker, which has been an early mover among established manufacturers in embracing electrification, said the contracts will guarantee supply for the next five to 10 years. “Our target is to make sure we have supply for at least five and better 10 years,” Mr Rebstock told the Financial Times. “For us it’s very important to make sure that our plans won’t suffer from a lack of supply.” The deal comes as carmakers race to secure supplies of critical raw materials needed for electric car batteries, which have jumped in price over the past two years. Last year BMW’s competitor Volkswagen launched a tender for five years supply of cobalt and invited suppliers to its headquarters in Wolfsburg. Discussions are understood to be ongoing with suppliers of the metal. The price of cobalt and lithium have more than doubled over the past year due to rising sales of electric vehicles, which topped 1.2m in 2017.
- How effective is the flu vaccine? Some interesting data from the Centers for Disease Control (CDC) say the flu vaccine may act just as a “booster” instead of an inoculation or immunity from the Flu. The statistics below lend credence to this notion.(WSJ)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com. Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Regards,
Paul J. McCarthy, III
President – Kisco Capital
(347) 709-9539