Reassessing the Rebound in Markets?

Fred Imbert and Silvia Amaro of CNBC report, Dow jumps more than 300 points after China offers a way to eliminate US trade imbalance:
Stocks rose on Friday as investors cheered potential progress in trade negotiations between China and the U.S.

The Dow Jones Industrial Average rose 336.25 points to 24,706.35, led by gains in UnitedHealth and Home Depot. The S&P 500 climbed 1.3 percent to 2,670.71, closing out of correction territory, as the materials and industrials sectors outperformed. The Nasdaq Composite advanced 1 percent to close at 7,157.23.

The major averages jumped to their highs of the day after sources told CNBC that China had offered a six-year increase in U.S. imports during recent trade talks. Bloomberg News reported on Friday that the deal would aim to reduce the annual U.S. deficit to zero by 2024.

Shares of Boeing and Caterpillar both closed more than 1.5 percent higher. Deere climbed more than 2.5 percent.

On Thursday, The Wall Street Journal reported that Treasury Secretary Steven Mnuchin had floated the idea of easing tariffs on Chinese goods as the two countries continue to negotiate on trade. The report sent the major indexes to their session highs on Thursday. However, a senior administration official told CNBC that there is “no discussion of lifting tariffs now.”

“That’s the key factor,” said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research. “If we don’t get that issue resolved, the market is going to hit upside headwinds no matter what happens.”

“If we get that issue out of the way, which will boost business and consumer confidence, there is still plenty of room for the market to do really well,” said Frederick.

“What we’re seeing, in terms of valuation, now that markets have recovered a lot of the lost ground, is they’re starting to become overvalued once again,” said Petra Bakosova, chief operating officer at Hull Tactical. “When the market bottomed out in December, that was a buying opportunity.”

Stocks also rose following comments from New York Federal Reserve President John Williams. Williams called for “patience and good judgment ” before raising rates, adding he expects “strong” and “healthy” economic growth for this year.

Manufacturing data released by the Fed also showed the sector’s biggest gain in 10 months in December. Those numbers were boosted by strong production in motor vehicles and other goods.

The major indexes were on track to post their fourth-straight week of gains. They were all up more than 1 percent for the week entering Friday’s session. Stocks are also up sharply to start the year. In fact, 13 trading days in, it’s the best start to a year for the S&P 500 since 1987, according to Bespoke Group.

The gains come as the corporate earnings season kicks off. Major banks, including J.P. Morgan Chase, Bank of America, Morgan Stanley and Goldman Sachs, released their quarterly results this week.

Most recently, Netflix reported better-than-expected earnings, boosted by stronger-than-forecast subscriber growth. However, the stock fell 1.6 percent on the back of disappointing guidance for the first quarter of 2019. Dow member American Express also fell after reporting disappointing earnings.
It was a big week in markets, there is lots to cover in my weekly market comment.

Let's begin with the big banks which all reported this week. The bank that performed best was Goldman Sachs (GS), surging over 10% since reporting earnings, and the bank that fared worse was Morgan Stanley (MS) which dropped during Thursday's session after a weaker-than-expected quarterly earnings report left many confused, including CNBC's Jim Cramer.

Morgan Stanley shares recovered on Friday and outperformed other big banks (click on image):

Now, all these banks are important but the three I was paying particular attention to were Citigroup (C), Goldman Sachs (GS) and JP Morgan (JPM).

Citigroup is the bank which is most leveraged to the global economy, so when its shares rise, it tells me that global growth may be picking up (click on image):

That's a nice V-shaped recovery since the December 24 low when it hit its 400-week moving average but I believe it will run into resistance at its 50-week moving average.

Goldman was the bank that I felt was way oversold coming into earnings and the one that would bounce the most, and it turned out I was right (click on image):

As you can see, it fell below its 400-week moving average on December 24 and has since popped right back to its 200-week where I think it will meet some resistance before trying to head up to its 50-week moving average.

If you want to know the easiest trade of the year, you're looking at it right above. This week on StockTwits, I reminded my followers that it was three weeks ago when I said Goldman shares were ridiculously oversold and due for a major bounce.

The easy money has been made, however, and it was the bounce from below the 400-week all the way to its 200-week moving average. It might add another 10% to reach its 50-week but that trade is riskier in my opinion than buying it when everyone hated it and was worried about the 1MDB Malaysian scandal which will now be dropped if Goldman coughs up $7.5 billion.

This whole Goldman 1MDB episode reminded me of the JP Morgan London Whale fiasco a few years ago when shares of JP Morgan fell to $32 and everyone was bearish. Then, JP Morgan CEO Jamie Dimon bought a ton of shares and made a killing off that trade (the so-called "Dimon bottom").

Granted, it's not exactly the same thing, but what I'm getting at is so many people were so bearish on Goldman and some were saying stupid things like "it's the next Lehman" that I was sure it was an important bottom around $150 a share and told people "I'm not bullish on banks but I'd be buying Goldman big time at these levels for a nice swing trade."

Now, as far as banks, last week when I looked beyond the market's mid-life crisis, I said the following:
Next week, the big US banks are reporting earnings and I want to see if financials (XLF) surge higher to cross above the 100-week moving average or get hit and drift lower back down to the 200-week moving average (click on image):

I must confess, I'm not very bullish on financials given my view that the US economy is slowing and rates are headed lower this year but we shall see.
And what happened this week? The Financial Select SPDR ETF (XLF) managed to just cross above its 100-week moving average and is looking to touch its 50-week moving average (click on image):

But I think that's all she wrote for US financials in Q1, it will be very difficult to fathom new highs as the US economy slows going forward because of the shutdown and other factors weighing on the economy prior to the shutdown (like the Fed rate hikes).

Moreover, have a look at shares of JP Morgan Chase shares here, the bellwhether for the sector (click on image):

That chart raises many concerns for me, a negative weekly MACD and I doubt you'll see new highs this year as the US economy sets to slow and rates head much lower.

In fact, I'm on record stating going forward the two large-cap Dow stocks I'd be shorting on any pop are JP Morgan and Boeing (BA) which is an industrial behemoth ready to turn south after an unbelievable run-up over the last 2 years (click on image):

I'd be shocked if Boeing shares make a new high this year but you never know, these algo-driven markets might have a few surprises in store for us:

I have to laugh when I read "CTAs are about to cover their recent S&P short positions and turn increasingly longer the higher the market rises" because on Decmber 26 in my comment on making stocks great again, I remember specifically stating:
Lastly, the fact that CTAs are now short every major market reassures me from a contrarian perspective (I'm short CTAs!).
CTAs are trend-followers, they stink at capturing major turning points but they do exceptionally well when there are clear long-term trends.

How do I know this? I used to invest in CTAs when I was working at the Caisse and know their strengths and weaknesses. In this environment, I prefer global macro funds which base their decisions on economic and financial fundamentals.

Anyway, we shall see what CTAs do as the market keeps rising but one thing is for sure, if the market keeps rising, a big if, then a new fear will take hold, missing out on gains:
The markets have a new fear: FOMO.

In the past few days, as we have reached the heart of earnings season, the markets have again resumed their upward drift. In discussions with traders, there is a new fear on the Street. It is not fear of the government shutdown. It is not fear of a continuation of the tariff war. It is not fear of a China slowdown getting worse.

None of those concerns have disappeared. But there has been a new one added to the top of the list: Fear of missing out — FOMO — on the rally.

“Big money managers cannot get behind of their benchmarks,” Tim Anderson, managing director at TJM Investments, told CNBC. “Last year, with the S&P down 6 percent, a lot of big managers were down even more. Now, with the S&P 500 up almost 5 percent this month, you are risking clients saying, ‘Hey, you underperform in a down market last year, and now you underperform in an up market?’ They are saying, I cannot not buy if the market is going up. ”
Never underestimate FOMO because when career risk is on the line, portfolio managers abandon all logic and jump into the markets, typically at the wrong time!

Then again, maybe things aren't as bad as they seemed in December and there's a reason why this market keeps climbing the wall of worry. Martin Roberge of Canaccord Genuity shared this in his latest weekly (make sure you subscribe to it):
Our focus this week is on the earnings downgrade parade following several disappointing guidance announcements YTD. As quants, we like to compare similar environments across time. As our Chart of the Week illustrates (click on image below), 71% of S&P 500 companies were in bear market territory at December lows, surpassing levels seen in 2011 and 2016. From an earnings perspective, only 35% of S&P 500 companies’ earnings have been downgraded by Street analysts so far (third panel). That compares with 50% and 46% of companies at 2011 and 2016 S&P 500 bottoms, respectively. A point could be made is that the upcoming earnings downgrades were already priced-in at December lows. Hence, should markets look beyond Q4 earnings over the next week or two, odds of a retest of December lows would diminish considerably.

I hope Martin is right but these markets make me very nervous and can flip on a dime. Easing of trade tensions, a halt to the shutdown (if it happens soon) will help relieve some pressure on stocks but I'm very concerned that we will retest those December lows this year, I just don't know exactly when (it could happen at any time).

Anyway, go back to read last week's comment on going beyond the market's mid-life crisis where I wrote this:
[...] if Risk On dominates markets this month and you see sectors and industries like financials (XLF), homebuilders (XHB), and biotech stocks (XBI) surge higher, that's good news. Also, if you see industrials (XLI), metal & mining (XME), energy (XLE) and emerging markets (EEM) move higher, that too is good news because it shows global growth is staging a comeback.

I remain highly skeptical that global growth is coming back but I'm keeping my eye on markets to try to gauge what's going on.

I hope I'm wrong but I fear that come this fall, the US economy will be in a recession and the magnitude of the slowdown depends on what the Fed and Congress do in the months ahead.

If there is a policy error on any front, Tom Lee's mid-life crisis will spiral into something far, far worse.

This is why I think it's way too early to throw in the towel on defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and US long bonds (TLT) which could get hit in Q1 if Risk On markets dominate.

The year is very long, anything can happen at any time but right now, I'm cautiously bullish and short volatility. We'll see if my mind changes next week after financials report.
The year is long and if you recall, last year stocks also started the year with a bang and ended it with a slam, so it's best to be cautious at this time.

In fact, some think this sluggish market may call for a ‘low and slow’ portfolio:
The slowing economy and political uncertainties have had many investors on edge, eager to turn on fully defensive mode. But think twice, it might be time to benefit from a so-called “low and slow” portfolio.

This is the advice from AB Bernstein’s analyst Noah Weisberger, who said the secret to outperforming the market in a downturn is to buy stocks that have “low and slow” characteristics — lower multiples and higher returns relative to the S&P 500 and trades that are less crowded.

“Although we expect the economic and market backdrop to deteriorate, we think it is too early to turn fully defensive, with the opportunity cost of missing out on end-of-cycle returns too great,” Weisberger said in a note on Friday. The stocks in the portfolio have “both quality and valuation support. It is also less crowded than the index, giving it a bit more resilience in case of another near-term sell off,” he added.

The overall market has rebounded from its multi-year lows in the fourth quarter of 2018. The S&P 500 is up more than 5 percent in the new year, recovering from its worst year since the financial crisis. To find opportunities, it’s important to spot the laggards that haven’t bounced back from their December’s bleeding, but have stable earnings expectations over the last month, Bernstein pointed out.

Bernstein’s 30-stock model low and slow portfolio contains Adobe, Broadcom, Boeing, Celgene and Union Pacific, Weisberger said. The portfolio has returned 4.7 percent since its inception on Dec.14, while the S&P 500 is up 1.4 percent during the same period.

“Despite its cyclical exposures in tech and materials, this portfolio would have outperformed the market during past slowdowns and matched the market’s performance during past contractions. We believe this is exactly the positioning warranted by the current macro and market environment,” Weisberger said.
I'm not so sure of some of his stock selections but agree with the low and slow approach for the remainder of the year. You can trade high-beta stocks and sectors, just be careful not to get caught when the music stops.

Lastly, I share some of the biggest gainers in the stock market over the last week (click on image):

The full list is available on barchart here. You will see a lot of small-cap stocks here which explains why they're doing so well so far this year (see below).

And here the biggest large-cap gainers year-to-date (click on image):

The full list is available on barchart here.

Hope you enjoyed reading this comment. As always, I ask all my readers to please donate or subscribe via PayPal on the right-hand side, under my picture. I thank all of you who take the time to donate, it's greatly appreciated.

Below, financials just had their best week in two years, is it time to fade them? CNBC's Melissa Lee and the Options Action traders, Carter Worth, Dan Nathan and Mike Khouw discuss the latest developments.

And small caps (IWM) just did something they haven’t in three decades but the recent strength may just be a head fake. According to founder Todd Gordon and Strategic Wealth Partners’ Mark Tepper, investors should look elsewhere for value.

Third, the S&P 500 is out of correction, but a number of stocks are sitting out. With CNBC's Melissa Lee and the Fast Money traders, Carter Worth, Tim Seymour, Dan Nathan and Guy Adami.

Lastly, Jim Paulsen, chief investment strategist with the Leuthold Group, joins CNBC's "Power Lunch" to discuss how the economy could see sub-2% growth but that could help stocks.