New highs on the S&P 500 were achieved for 2019 on Friday as OPEX (monthly options expiration) delivered again on ramping stocks higher – thanks options traders! The rally (bounce) from the December low is long in the tooth and reaching an extreme measurement (like an Irish Mile) which is calling into question the direction of the next move. Nothing goes in a straight line forever so this leaves the stock market in a vulnerable position for a larger corrective move to the downside.
The chart below shows the S&P 500 index which almost tested the 200 day last week only to rally in near vertical direction into the OPEX close on Friday. There may be a bit more momentum to the upside into the mid 2800s but I would be surprised to see it move much higher without a larger correction. If I am wrong and we keep going higher, then we can party like a euphoric rally out of 1999. Sentiment and economic data across the globe (see below) has been weak so I am putting this scenario as an outlier in the probability spectrum.
Most notable this week was a pronounced divergence from 10YR US Treasury bond yields. As stocks moved higher this week, bond yields moved lower in contradiction to what you want to see with new interim highs in the S&P 500. The bond market is not buying this rally. In the chart below of 10YR US Treasury yields, you can see we lost support at 2.63% and closed below this level which has held for the last 11 weeks when stocks bottomed in December. The closing yield on the week, 2.58%, is the lowest in 14 months.
What to watch next week:
- A short-lived rally early in the week that fades out and breaks 2800 is a good signal that a larger corrective move is underway.
- Watch the front-end of the yield curve! 6MO T-bills are yielding higher than 5YR Treasury bonds. Inversions in the yield curve are a prelude to weakness in the economy.
- Your co-workers on Monday may have had too much Guinness on St. Patrick’s day so have a heart and buy them a whiskey to get their day started (goes well with coffee).
Chart of the Week!
Economic & Central Banking Snippets
- Turkey entered recession at the end of 2018 as a collapse in the lira and a sharp hike in interest rates brought economic growth to a halt. The economy contracted by 3% year-on-year in the fourth quarter of 2018, according to official data released on Monday. That makes two consecutive quarters of contraction which crosses the line into how economists define a recession. (WSJ)
- The February Core CPI was up by 2.1% (YOY), the 12th straight month above 2%. The core rate continues to be driven by rents which grew 3.6% (YOY). FYI, housing makes up 42% of the CPI.
- Tepid inflation and rising wages are leaving extra dollars in the pockets of American workers. Headline CPI rose 1.5% in February from a year earlier, the slowest pace since September 2016. That left inflation-adjusted average hourly earnings for all workers up 1.9% from a year earlier. Production and nonsupervisory employees, a narrower category that includes blue-collar workers, saw real wages rise by 2.2% which is the strongest gain since late 2015. That bodes well for consumer spending, a key driver of economic growth. (WSJ)
- Chinese factory output slowed to its weakest pace on record early this year running at +5.3% (YOY). One of the weakest readings since that data series began in 1995. US tariffs are probably partially responsible for weak factory output as trade data released last week showed Chinese exports declining by the most in three years.
- The Bank of Japan offered a bleaker picture of the economy on Friday and left its ultra-easy monetary policy on hold. The central bank said Japan’s exports and production have shown some weakness, a downgrade from its January assessment. It also adjusted its earlier view that overseas economies were growing firmly on the whole, saying some slowdowns have been observed. (WSJ)
Macro Snippets
- Almost 80 investment advisory firms—including divisions of Wells Fargo & Co. and Deutsche Bank AG —agreed Monday to pay back over $125 million to clients who were steered into higher-cost mutual funds without adequate disclosure. (WSJ)
- Tesla has rolled back plans to close stores and will raise prices on some of its electric-vehicle models. The electric-car maker has also reached an agreement with lenders in China to receive as much as a half-billion dollars to invest in its Shanghai factory currently under construction. (WSJ)
- Jumia, Africa’s largest e-commerce platform, filed paperwork with the Securities and Exchange Commission for an initial public offering on the New York Stock Exchange. The Lagos, Nigeria-based Jumia said it would be the first African technology company to list on the exchange. Its most recent funding round in 2016, when Goldman Sachs Group Inc. bought a stake, valued Jumia at about $1.2 billion, with that amount qualifying the company as the continent’s first technology “unicorn” in the lexicon of Silicon Valley. (WSJ)
- Facial recognition’s ‘dirty secret’ Imperfect but rapidly improving facial recognition algorithms rely on a ready cache of millions of photos. Legal experts warn that researchers and corporations are exploiting social media, scraping photos without the knowledge of the people who posted them. In Shenzhen, a subway station is experimenting with using facial recognition to so that riders can pay with their face. (NBC, SCMP)
HAPPY ST. PATRICK’S DAY!!! 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.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital