THE Fortnight of 2018

The next two weeks will be critical for the stock market. The bounce from the 2/9 low ended this week and now comes wether we test that low or hold this three+ week uptrend. Let’s take a look at an updated chart for the S&P 500 to get an idea of what might happen:

S&P 500 ETF - $SPY
S&P 500 ETF – $SPY

As you can see in the chart, we found support on Friday as there was an elevated amount of pessimism as measured by the number of puts bought to hedge or speculate we were going straight down to the 2/9 low. This type of activity typically portends a reversal to the upside unless there is a fundamental catalyst that evidences a crack in the economy (didn’t happen). Now we have a pivot to measure from as we likely move to the upside early next week that will run-up against strong resistance. Then what?

A re-test of the 2/9 low could get ugly if that level is breached as it would bring in more sellers and call into question the end of the bull market.  The flip side is that we pull back, find support and move towards new highs which would imply several more weeks (or months) of upside in stocks. It is hard to put a finger on a catalyst for a bear market or a recession but I suppose a dramatic fall in stocks could precipitate a slowdown in the economy given that low interest rates have been a freebie for consumers and corporations alike for many years – perhaps, something like a hangover from a sugar high.

I think the base case is that 2018’s price action is all part of transitioning period to rising interest rates and higher inflation. Volatility should be expected in these times of transition so let’s see if the market can make up its mind and send a clear signal in the next several trading sessions. By the way, interest rates are behaving and didn’t move much at all this week so I’ll have an updated chart for next week.

Chart of the Day!

Going to the bathroom to use your phone again?


Economic & Central Banking Snippets

  • The new Federal Reserve chairman gave an upbeat assessment of America’s outlook in his first Congressional testimony in the role, vowing gradual increases in interest rates as the central bank seeks to bring inflation to target while avoiding an “overheated economy.” Jay Powell suggested in prepared testimony to Congress that the economy is likely to shrug off the impact of the recent volatility in financial markets, declaring that some of the headwinds that had held the US back in recent years were now fueling growth. Among the new economic drivers are stimulative fiscal policy and firm foreign demand for US exports, said Mr Powell, predicting a pickup this year in inflation and wage growth. (FT/WSJ)
  • US Consumer Confidence was unshaken by the stock market swings this month, with optimism about economic prospects and the labour market pushing sentiment to its highest point since 2000, according to a closely watched gauge. The consumer confidence index, tracked by the Conference Board, rose to 130.8 in February from a revised 124.3 in January (previously 125.4).
  • Durable goods orders fell 3.7% last month from December, the Commerce Department said on Tuesday. That’s the biggest decline in six months and was far worse than the 2 per cent decline economists had forecast.
  • Japanese industrial production fell at a faster rate than forecast in January, recording the sharpest fall since the 2011 earthquake. Industrial production fell 6.6% month on month in January, tumbling at a faster pace than the 4.2 per cent decrease forecasts by economists in a Reuters poll. (Reuters/FT)
  • Gross domestic product (GDP) grew by an annualized 2.5% in Q4 according to a second reading from the Bureau of Economic Analysis. That is a tad lower than the initial reading of 2.6% issued in January and growth of 3.2% recorded in the third quarter. (FT)
  • India has regained its title as the world’s fastest-growing major economy, after figures confirmed it grew by over 7% on an annualised basis in Q4. This growth rate overtakes China. The growth in Q4 was powered in part by a rebound in the construction sector, which was growing at just 2.8% in Q4 of 2016 but grew 6.8% during the same period in 2017. (FT)
  • Pending home sales, or signed contracts for homes where transactions have not yet closed, fell 4.7% in January, the National Association of Realtors said on Wednesday — its steepest one-month decline since May 2010. Economists had been looking for an 0.3% increase, according to a Thomson Reuters survey. (FT)
  • The Federal Reserve Bank of New York announced on Wednesday that it will begin publishing a new reference rate chosen by an industry group to serve as an alternative to the scandal-ridden Libor benchmark. The new rate, called the Secured Overnight Funding Rate, was built to reflect the cost of borrowing cash secured against US government debt. The SOFR rate will be published April 3. (FT)
  • The three biggest US automakers reported a fall in US new vehicle sales in February, while some big automakers reported a modest decline in price incentives last month. US sales slipped last year to 17.2m from 17.55m in 2016, the first annual decline since the financial crisis. (FT)

Macro Snippets

  • GE to restate earnings for past two years General Electric is planning next month to announce significant restatements of its 2016 and 2017 earnings, including a 15% reduction in its adjusted earnings for last year, as it adopts a new accounting standard for recognizing revenue from long-term contracts. (FT)
  • Germany’s top administrative court has ruled that the country’s cities have the right to ban diesel cars, in a move that could have far-reaching consequences for the owners of 12m vehicles in Europe’s largest market. The ruling is a significant victory for environmental groups that say diesel bans are the only effective way to tackle the persistent problem of air pollution in German cities.
  • Knock, knock Amazon will buy Ring, a maker of internet-connected doorbells and security cameras, for around $1bn as it accelerates its Alexa-powered push into the “smart home”. Jamie Siminoff, Ring’s chief executive, pitched his idea on Shark Tank in 2013. He failed to raise money on the reality TV show but went on to receive investment from other backers including Sir Richard Branson’s Virgin Group. (FT)
  • The UK arm of Toys R Us has collapsed into insolvency, putting thousands of jobs at risk just two months after the chain won creditor backing for a restructuring plan to tame its unmanageable rent bill. Executives had been battling to raise cash to pay a tax liability that fell due this week, but the efforts fell through after a number of private equity funds and restructuring specialists walked away. Insolvency specialists have begun the process of closing its British operations. (FT)
  • The Securities and Exchange Commission has issued scores of subpoenas and information requests to technology companies and advisers involved in the red-hot market for digital tokens, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multi-billion-dollar U.S. market for raising funds in cryptocurrencies. This act follows a series of warning shots from the SEC that many token sales, or initial coin offerings, may be violating securities laws. Companies use coin offerings to raise money for everything from file-sharing technology to pet passports. (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



Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.