Overbought Condition

The seasonal price patterns are positive for the next two weeks (Santa Claus rally) but the stock market has achieved an overbought condition as we closed out this week. On the weekly chart below (each bar is one week), I have yellow vertical lines showing overbought conditions according to the relative strength index (RSI) on the bottom of the chart.

As you can see, the S&P 500 has only been in overbought territory nine times since 2007. In the bottom center of the RSI indicator you can see there was a divergence for two years approaching the 2015 top which highlighted a weakening uptrend that resulted in a sharp correction. The January 2018 top achieved an RSI of 90 which was one of the highest readings in the history of the S&P 500. The following December 2018 low resulted in an oversold condition on the RSI and one year later the S&P 500 is oversold.

The S&P 500 is up over 10% in just 10 weeks so the market is turning up in a steep fashion so a correction of some kind looks imminent. However, you could have said that at the end of 2017 where the market drove higher into that 90 RSI reading so that scenario could play out as the seasonal strength may dominate the tape into the new year.

Chart of the Week!

Chart of the week.

Economic & Central Banking Snippets 

  • A pioneer of negative rates pauses the experiment. Sweden’s central bank, one of the first to wield negative interest rates, has ended that policy, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure. (WSJ)
  • The December Markit US manufacturing and services PMI was little changed from November at 52.2 vs 52 last month. With services leading the way, Markit said “Although the increase in new business remained historically muted, the rate of expansion quickened, with companies indicating the fastest rate of new order growth for 5 months.” Export orders also increased after 4 months of declines.
  • The IHS Markit eurozone manufacturing purchasing managers’ index fell to 45.9 in December, from 46.9 in the previous month — the 11th straight month of contraction. (FT)
  • US industrial production, a gauge of output from factories, mines and utilities, climbed 1.1%month-on-month in November, marking its biggest monthly increase since October 2017, the Federal Reserve said on Tuesday.
  • The Bank of England held its main interest rate steady at 0.75% but warned that it may need monetary policy stimulus if global growth does not stabilize and Brexit uncertainties linger. The central bank cut its GDP forecast for 4Q’19 to 0.1% from 0.2% to reflect the current economic weakness. (Investopedia)
  • The Bank of Japan kept policy unchanged as the country’s economy has been on a “moderate expanding trend” with some weakness in exports, production, and business sentiment due to slowdowns overseas and natural disasters. Earlier this month, Prime Minister Shinzo Abe launched a $121 billion fiscal stimulus package, the first since 2016. (Investopedia)

Macro Snippets

  • Congress passed the most significant changes to the nation’s retirement system in more than a decade, a move designed to help Americans save more. With the U.S. population aging and employers shifting responsibility for retirement saving to individuals, lawmakers have grown concerned that a significant portion of Americans are at risk of outliving their money. Americans between the ages of 35 and 64 face a retirement savings shortfall of $3.83 trillion, with 41% of households projected to run short of money in later life. (WSJ)
  • TRASH: For decades, America and much of the developed world threw their used plastic bottles, soda cans and junk mail in one bin. The trash industry then shipped much of that thousands of miles to China, the world’s biggest consumer of scrap material. That changed last year when China banned imports of mixed paper and plastic and heavily restricted other scrap. Since then, India, Malaysia, Vietnam, Thailand and Indonesia—other popular markets for the West’s trash—have implemented their own restrictions. The moves have caused a seismic shift in how the world deals with its waste as nations are now faced with the question of what recycling is worth to them. They are undertaking new investments in domestic processing, ramping up alternative strategies such as incineration and rolling out education campaigns to teach homeowners to sort trash. Others are dropping programs altogether. (WSJ)
  • Amazon is no longer allowing third-party sellers to use FedEx’s ground-delivery shipping, the latest escalation in the ongoing rivalry between the companies. FedEx in August announced it would end its ground-delivery contract with Amazon, after ending its express U.S. shipping contract with Amazon in June. (Investopedia)
  • The House of Representatives passed a new version of a trade agreement to link the U.S., Mexico and Canada, an important step toward updating North America’s trade rules and dispelling concerns Washington will act on threats to sever links with its neighbors. (WSJ)
  • Boeing is considering either suspending or cutting back production of the 737 MAX amid growing uncertainty over the troubled plane’s return to service. Boeing management increasingly sees pausing production as the most viable among difficult options which could carry significant implications for the U.S. economy. Boeing’s inability to deliver the aircraft during the prolonged grounding has already affected the nation’s trade deficit. They could also spur job cuts and furloughs across the global aerospace industry, as well as further disruption to airlines hit by the grounding of a fleet of around 800 jets. (WSJ)

That is all for now until next week’s Market Update and thank you for being a subscriber!

Happy Holidays!

Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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