Tapping Out

The S&P 500 tapped a line of resistance for the month of January as you can see in the chart below. The 161.8% Fibonacci extension at the top of the chart is essentially an echo of the 2018 High/Low – so the fact that the S&P 500 was rejected at this level (3,321) is of significance.

S&P 500 Index (SPX)

As I wrote in Warning Signals there have been several technical indicators cautioning of an impending correction over the last several weeks. Essentially, the Wuhan virus coincides to the market capitulating to the weak technicals that have been brewing under the surface. But to what degree? We will find that out in the coming weeks.

The chart below highlights one metric that highlights how monetary authorities across the world have cut interest rates 80 times over the last year and printed upwards of $1 trillion over the last four months. This leaves the equity markets in a vulnerable position as too much stimulus causes froth.

Several countries are declaring emergencies while airlines are suspending their flights to China which curbs tourism and jeopardizes the supply chain for companies around the world. From what I read, the virus is still spreading so we will have to wait and see how long it takes for new cases to plateau before we can assess how much global GDP will be impacted.

China’s stock markets have been closed all week due to the Lunar New Year so Monday’s session is likely to have some fireworks. Stay tuned!

Chart of the Week!

This map shows levels of preparedness across the world while Africa’s vulnerability is immediately noticeable. 

Economic & Central Banking Snippets 

  • Gross domestic product expanded at a 2.1% annualized rate for a second straight quarter, according to Commerce Department data Thursday.
  • Consumer spending decelerated to a 1.8% pace, below projections and the weakest since the first quarter of 2019.
  • The Bank of England kept interest rates steady at 0.75% in Governor Mark Carney’s final meeting, as it waits for more evidence of an economic rebound before making further cuts.
  • Japan’s factory output fell at the fastest pace on record in Q4 amid sluggish demand at home and abroad, reinforcing views the economy likely contracted. The Wuhan virus may have a big impact on Japan as China is the country’s second largest export market and accounts for 30% of all tourism. (Reuters)
  • The Baltic Dry shipping index (dry bulk, such as iron ore) dipped below 500 for the first time in four years. (WSJ)

Macro Snippets

  • Investors sold $2.9 billion from high yield bond funds for the week ended Jan. 29, nearly wiping out gains of the $3.6 billion added earlier in January. Investment Grade funds continued to receive strong inflows, adding $4.4 billion, according to Refinitiv Lipper. 
  • The coronavirus outbreak is now a global public health emergency, according to the WHO. The international body told countries they have to be prepared for containment and share all information. The U.S. government issued a Level 4 “Do Not Travel” advisory for China.
  • Hong Kong flag carrier Cathay Pacific has announced it will cut its flights to and from mainland China by at least 50% in the latest sign of how the coronavirus epidemic is affecting companies and industries. (FT)
  • Industrial giant 3M says it will cut 1500 jobs and forecast a decline in sales and profits in 2020 as the maker of adhesive tape and air filters faces a decline in revenue from Asia, its second biggest market. (Investopedia)
  • Boeing posted its first annual loss in more than 20 years as the airplane manufacturer struggled to regain traction following the two fatal crashes of its 737 Max planes. (Investopedia)
  • Altria said the value of its 35% JUUL stake is $4.2 billion as of Dec. 31, down from the $12.8 billion it paid in 2018. It recorded a pre-tax charge of $4.1 billion due to the legal cases pending against the e-cigarette maker. Altria also wrote down its stake by $4.5 billion in October. (Investopedia)
  • U.S. farm bankruptcy rates jumped 20% in 2019 – to an eight-year high – as financial woes in the U.S. agricultural economy continued in spite of massive federal bail-out funding, according to federal court data. According to data released this week by the United States Courts, family farmers filed 595 Chapter 12 bankruptcies in 2019, up from 498 filings a year earlier. The data also shows that such filings – known as “family farmer” bankruptcies – have steadily increased every year for the past five years. (Reuters)

That is all for now and thank you for being a subscriber! 


Paul J. McCarthy, III

Paul McCarthy

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