Update 78: Stocks-Who’ll Stop The Rain?

January 31, 2020 — Observations & Opinions

Last Week/Next Week…..Well we said there were cracks in the armor last week and this week we got full on acceleration to the downside. When the virus hit a week ago; I heard Tudor Jones said to take all risk off for 2 weeks to see where this thing oi going.
So far; that view has been brilliant and heeded by some as there has been a stampede into treasuries and ship jumping out of junk bonds(spreads blew out 70 pts some say on its way to 425-450)) to Investment Grade. There were big winners and big losers in the earnings parade we saw this week and we saw personnel changes at some big firms (IBM switched to a man familiar with cloud
business and hybrid cloud plus maybe he can leap frog IBM to the next game in town which is edge computing while accelerating a ROI on their investment in Red Hat. Winners included AMZN MSFT AAPL MLDZ KO HSY WDC TSLA MO although some gave back most all their initial gains. The Losers include stocks directly affected by the virus SBUX Airlines Travel Leisure, CVX XOM HON CAT AMGN BIIB BA(halted production of their popular aircraft and their debt was downgraded close to junk by Moody’s). You know…there was a slowdown already in place prior to the virus basis the Q4 numbers for growth, consumer spending and business spending. We now have a risk of the yyield curve inverting again and the FED says that after April their asset purchases and liquidity injection (they say NOT QE while markets screamed that it was) may fade but the feeling is the FED will be there is we drop but not impede the upside if we advance. Internationally, the dollar has been firm so selling in EEM nad FEZ has gone on as Asia’s debt issuance froze this week and while UK left the EU no big changes until the end of 2020. Italy & France saw their economies contract while Spain and Germany were slightly above water. If we can get the Nikkei above 24000; the upside could catch people sleeping.
NO REST FOR THE WICKED…Next Week we start off Monday with the re-opening of China’s market (ouch!) and manufacturing data and ISM numbers. Just when it looked like global PMI’s were stabilizing or turning we get this epidemic. Tues State of the Union (Turnaround Tuesday?) Wed. US Trade Balance (Tariffs Still Mostly On) & Eurozone-China Composite PMI Thurs Fed’s Kaplan talks (sounded sobering last time I listened) & ECB’s LaGarde who’s still figuring out her new job.Friday-Payrolls & China Trade Data
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Stock Market

We saw 3340-3400 S&P as an area of potential short term exhaustion and that it has been what has played out. There was a ton of flashing warning technical signals and the economic numbers have not been great. Our view (and the Transport & RUT maybe tipping us off) is that a test around the 50 day (3200) and 200 day moving averages (3030 area) might be in the cards. Another tip was money flows out of risk on ETF’s and traders were liquidating while allocators were buying. Something started to spook traders last week. Again with all the longer term moving averages moving higher The indices such as the S&P & QQQ are dominated by 5 stocks MSFT GOOG AAPL FB and these are the stocks that kept us afloat. The cloud/AI, advertising and the huge amount of subscribers to prime (150 Million) are the engines. When MSFT & AMZN announced they got a bang of about 10-14% afterwards as well as INTC & IBM. Stocks BABA & WYNN could stabilize when the smoke clears and an ETF called EMQQ has about 50% China the India Brazil & Africa exposure in tech, internet commerce and communications. A Billion people in India till do not have a smart phone is what I’m told so the room for growth in these countries seems reasonable. For sophisticated high net worth traders; I was looking at GOOG announcing earnings Monday so a weekly 1400 put sold for 25 and a 1470 call bought at 25 would contract you to buy stock at 1400 and have the right to buy at 1470 (close 1434). If we shoot up after earnings anything like MSFT & AAPL or AMZN you could potentially cassh in your calls, if it stay between the two strikes it could be an offset and if it tanks you are liable to be a purchaser of 100 shares (per contract) at 1400 or $140 grand…clearly not for everyone but interesting.

Bond Market

Rush to treasuries occurred this week as Q4 data and the unknown longer term effects of the virus had investors seeking safety and for Asians & Europeans some actual yield. However; there are those who believe a 1.35 to 1.60 range may begin on the 10 yr.
treasury but my guess is the ceiling could be 1.80 and 1.40 if we settle down. Later in the year spreads may widen and if we turn these numbers around 2-2.50% is not off the table. You see an inversion and economic/earnings numbers plummet then the Fed will be called into action and they may do something to the short end where they have much better control. Watch for Junk problems as the oil market sometimes dominate high yields and the virus, demand and supplies-stockpiles make a lot of companies vulnerable to default as no free cash flow and sub 66 prices are a killer. ARAMCO sold their shares into a rising market (as we suspected) and now that they are sold the bottom is coming out a bit on prices.

US Dollar

Gave up some ground this week but still has a 97 handle which puts it smack in the middle of our trading range view of 99-95.
Where you going to go? Bitcoin-Gold?…Japanese yen with that debt to GDP ratio?…the Euro with those economic numbers? or how about the Pond Sterling…with Boris & a new regime (even Harry split:)…..no the yield advantage and the tech & growth advantages are still colored Red White & Blue….of course until & if we blow out 95 – on the downside.

Crude Oil

The virus has spooked this market but it was already in the fade mode beforehand. As we said the move to 66 was short lived as well as the oil stocks that advanced. Is all hope lost…well the shares seem to be telling us that (CVX XOM SSLB RDSS.A dividend-buyback talk) and trading under the 50-200 day moving averages does not exude confidence. However we are still above the important 50 level so if you are bullish you have to be telling yourself that it is darkest before dawn.

Gold Silver Copper

Copper being an industrial metal went up to resistance at 3 bucks and turned south. Supply chain disruptions and basic panic not helping so for now monitor at best. Gold & Silver rebounded this week but a relatively firm dollar and no inflation and reitance at 1600 puts traders on edge. GDX seems to be having trouble @ 30 bucks and if we take out 27-28 next week we’d be concerned.
Longer term moving averages are pointing up so no time to be bearish but more consolidation could be in order if we fail at 30.

Soybeans Ags

Well we seem to be not getting the expected result from the trade deal as Argentina (beef) and Brazil (grains) seem to be getting the business due to supplies and currency advantages…some say round 3 of subsidies may be on there way.
As said ..soybeans needs to clear and sustain 950 and 10 to get really excited but it’s headed the wrong way.

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Mohammed Phaka - February 1, 2020



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