Investors Left Guessing on Stocks?

Fred Imbert of CNBC reports, Stocks fall after wild session as conflicting trade news keeps investors guessing:
Stocks traded in a wide range on Friday as investors digested different comments and reports on global trade, while Apple shares dented the broader tech sector.

The Dow Jones Industrial Average closed 109.91 points lower at 25,270.83 after falling 300 points earlier in the session. At its session high, it was up as much as 198.24 points. The S&P 500 pulled back 0.7 percent to 2,723.06 as Apple's 6.6 percent decline dragged down other major tech names like Facebook and Alphabet. The tech-heavy Nasdaq Composite dropped 1 percent to end the day at 7,356.99.

The major indexes pared some of their losses after President Donald Trump told reporters the U.S. and China are much closer to striking a deal on trade, saying the two countries will have a good deal in place.

Trump's comments come after Larry Kudlow, his top economic advisor, told CNBC there is no trade plan in the works for China. "There's no massive movement to deal with China," Kudlow told CNBC's "Halftime Report. " "We have already put out asks to China with respect to trade."

"We're doing a normal, routine run-through of things that we've already put together and normal preparation," he said. "We're not on the cusp of a deal." When asked whether the president explicitly requested his top advisors to drum up a trade deal, Kudlow said "no." Kudlow's comments sent equities to their lows of the day.

Meanwhile, Kudlow's remarks contradicted a Bloomberg report from earlier on Friday that said Trump had asked officials to prepare a draft for a U.S.-China trade deal.

"It's still all about trade," said JJ Kinahan, chief market strategist at TD Ameritrade. "Most of the trading we're seeing is related to earnings or trade."

"The recent moves we're seeing reflect a return to more historical levels of volatility," said Kinahan. "I don't think this will abate."

Apple fell after the company's iPhone shipments for last quarter missed estimates. The company also offered light guidance and announced major changes to its reporting structure. These were enough to overshadow stronger-than-expected earnings and revenue.

Stocks initially surged after the Labor Department said the U.S. economy added 250,000 jobs last month. Economists polled by Refinitiv expected an addition of 190,000. Wages, meanwhile, rose 3.1 percent on an annualized basis in October for the first time since the recession.

"Today's stronger than expected October employment report was a mixed bag for stocks," said Alec Young, managing director of global markets research at FTSE Russell. "On the positive side, strong job growth will allay fears of slowing economic growth. However, with wages up 3.1 percent year over year … it will be more difficult for the Fed to slow its rate hiking campaign."

Investors are worried that rising wages and increasing inflationary pressures will push the Federal Reserve to raise rates at a faster pace than expected. The central bank has hiked rates three times this year and is forecast to raise them once more before year-end.

"There's good news for everyone in this report, but it also makes it clear that the economy is running a little bit faster than we can probably sustain," said Jason Thomas, chief economist at AssetMark. "The Fed must, and is trying to, slow down the economy" so growth remains sustainable.

Treasury yields rose following the data's release. The benchmark 10-year note yield traded around 3.21 percent while the two-year yield climbed to 2.91 percent and hit its highest level in a decade.
This morning's stronger than expected US October employment report was what sent the 10-year note yield to 3.21%, close to its 52-week high of 3.25%, and US long bond prices (TLT) to a new 52-week low (click on images):

What sent bond yields up and bond prices down? Fears of inflation. Specifically, wages in the US grew at an annual rate of 3.1% in October, their fastest pace in nine years, stoking fears of inflation:

Great news, right? It's good news for workers if it's sustainable (I have serious doubts) but it's bad news for markets because it pretty much ensures the Fed will hike rates again in December and possibly twice or three times more next year.

The latest US employment report changes nothing in terms of my analysis in the bond bull bull I wrote about in my last comment. If anything, it heightens the risks the Fed will keep on hiking and overshoot, precipitating the US and global recession in nine to 12 months.

This is why I keep telling you to use the weakness in US long bonds (TLT) to hedge your portfolio going forward. [Note: An astute reader of my blog prefers the Vanguard Extended Duration Treasury Strip ETF (EDV) but I'm more comfortable recommending the TLT because it's more liquid and serves the purposes I'm looking for].

Importantly, on a risk-adjust basis, I wouldn't be surprised if US long bonds outperform all other asset classes over the next three, five and ten years. And no, I'm not smoking cannabis as I write this comment, I'm dead serious.

Anyway, back to stocks, it's more of the same. The rise in rates signals more trouble ahead, especially for large-cap tech stocks that ran up a lot over the last two years and many high-flying growth stocks.

You can expect to see a lot more volatility in these stocks because they ran up the most and are going to be traded heavily as they got clobbered the most in the recent selloff.

As I told you last week when I went over the worst October since 2008, you can trade the big tech names, just be careful not to overstay your welcome.

I'll give you two examples, check out shares on Amazon (AMZN) and NVIDIA (NVDA) which got clobbered during the recent selloff but bounced big this week (click on images):

Expert traders bought the dips on these stocks playing the bounce back to or even above the 200-day but I don't see new highs coming in either stock this year or next year. It's just a countertrend rally but the downtrend has only begun.

This is how you know you're in a bear market for many stocks, they can't seem to break free of the downtrend and even if they see huge countertrend rallies, they don't make new 52-week highs.

As I stated last week, the market is shifting from growth as a defensive/ Risk OFF trade to stability as a defensive/ market meltdown phase.

This market is rewarding companies with strong earnings and good forward guidance. You saw it today with Starbucks (SBUX), Teva Pharmaceuticals (TEVA) on Thursday and General Motors (GM) and Under Armour (UA) earlier this week. There were plenty of others but the point is stability and visibility will be rewarded, disappointments and uncertainty will be severely punished.

If this trend continues, it will be great news for top value managers who know how to pick solid companies that are not being valued correctly by the market.

But I have a caveat, I'm not ready to call revenge of the value managers just yet, I still think the macro environment is what matters most and those who don't get it right are doomed to underperform.

Importantly, given where we are in the cycle, I'd steer clear of cyclical stocks like energy (XLE), financials (XLF), and industrials (XLI) and focus on defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ). And I would hedge that stock exposure with US long bonds (TLT).

Still, it's not an easy market. For example, a lot of staples like Kraft Heinz (KHC) aren't performing well this year and the XLP has done well because of the big weighting of Procter & Gamble (PG) in this ETF (roughly 13%).

Poor Warren Buffet, he lost nearly $4 billion today in his Apple stake and is gettting massacred with Kraft Heinz, his fifth largest stock holding (click on image):

It will be interesting to see if he bought more as the stock plunged this quarter.

Anyway, it proves these are tough markets, very tough, which is why most active managers continue to underperform. We shall see if they perform better in a bear market (in theory, they should).

Below, hedge fund billionaire Paul Tudor Jones knows that the stock market is facing a reckoning as the Federal Reserve continues its cycle of raising interest rates to combat inflation but he doesn't think we're at the tipping point yet:
"I think you'll have a chance to see the old highs revisited if and when and before we go into a bear market," Jones said. "I'm thinking through the end of the tightening cycle, the pause, the excitement around that pause, and then I think, boy, then you've got to pay attention. Then you've got to pay attention. We'll probably rally after whenever they finish [tightening]. Then you have to pay attention."
He’s right about the Fed causing the next recession but I think he's dreaming if he thinks stocks are going to revisit the old highs. I'm paying attention right now but in the short run, we can have a decent end of the year (but nothing great).