Will Stocks Keep Chugging Higher?

Fred Imbert and Ryan Browne of CNBC report, Dow rises more than 180 points to retake 26,000, notches 9-week winning streak:
Stocks rose on Friday as another round of trade talks between the U.S. and China wrapped up with investors increasingly more hopeful a deal will be struck.

The Dow Jones Industrial Average gained 181.18 points to 26,031.81 as Intel outperformed. The 30-stock index also broke above 26,000 for the first time since early November and posted its ninth consecutive weekly gain, its longest streak since May 1995. The Nasdaq Composite advanced 0.9 percent to 7,527.54 as shares of Facebook, Amazon, Netflix and Alphabet all closed higher. The tech-heavy Nasdaq also notched its ninth straight weekly gain, its longest streak since May 2009.

The small-caps Russell 2000 gained 0.9 percent to close at 1,590.06 and recorded its longest weekly winning streak since 1996.The S&P 500 climbed 0.6 percent to 2,792.67, led by gains in the tech sector.

Stocks have been off to a roaring start to the year. The major indexes are all up at least 11 percent in 2019 as the Federal Reserve indicates it will be patient in raising rates. Hopes the U.S. and China end their trade skirmish has also boosted equities. The gains also follow a massive drop in stocks to end 2018.

"It's pretty extraordinary the amount of gain that we've had," said Thomas Thornton, founder and president of Hedge Fund Telemetry. But "many of my indicators are showing very overbought conditions now with more and more upside exhaustion signals."

"I really wish I could pick a sector that had defensive qualities right now, but everything has gone up so dramatically that when the pullback comes, it will probably be widespread," Thornton said.

President Donald Trump met with Chinese Vice Premier Liu He on Friday. Liu delivered a letter to Trump saying Chinese President Xi Jinping hopes the two countries can redouble efforts to strike a trade deal.

Trump's meeting with Liu on Friday comes after a U.S. delegation met with Xi last week. Sources told CNBC that Trump and Xi are also discussing a summit at Mar-a-Lago late in March. The sources also said China is committed to buying $1.2 trillion in U.S. goods.

"This is constructive not just for the market but also for the global economy," said Quincy Krosby, chief market strategist at Prudential Financial. A deal "would help the Chinese economy stabilize. That obviously helps the global economy."

"It has a broader impact than the bilateral U.S.-China relations," Krosby said.

Optimism has risen over the chances of both countries securing a deal to end their protracted trade war, but some experts say the most difficult part is yet to come.

"There's obviously an incentive for both sides to reach a deal," James Athey, senior investment manager at Aberdeen Standard Investments, told CNBC "Squawk Box Europe" on Friday. "The problem is that you're now getting to the more difficult part of the negotiation, which is things like the IP (intellectual property) problem."

The U.S. is simultaneously trying to figure out trade matters with Europe. The European Union is preparing to target heavy machines made by U.S. companies like Caterpillar if the U.S. slaps tariffs on cars made in the EU, according to a Bloomberg News report. Shares of Caterpillar dipped 0.1 percent on Friday.

The Trump administration is threatening to slap tariffs of up to 25 percent on European autos and auto parts.

"The markets may find that, as soon as they get out of the frying pan with respect to China, they may find themselves back in the fire with respect to Europe," said Bruce McCain, chief investment strategist at Key Private Bank. "For that reason, this market that has risen very sharply and very quickly in a world that has not resolved all of its problems, could lead to some disappointment."

"It's not like we need to be discouraged and raise tons of cash, but I think that the optimism in the market is probably overdone at this point," McCain said.

Intel shares rose more than 2 percent on Friday after Morgan Stanley upgraded the stock to overweight from equal weight, noting Intel could get a boost now that Bob Swan is the full-time CEO.

Shares of Kraft Heinz plummeted 27.46 percent after the consumer products company disclosed an SEC subpoena from an investigation into its accounting practices. The company also disclosed a $15.4 billion write down.
Let me begin my weekly market comment with shares of Kraft Heinz (KHC) which got clobbered today on huge volume following the SEC's anouncements it's looking into their accounting practices (click on images):

You'll recall last week I went over top funds' activity in Q4 2018 and told you that Warren Buffett had a tough year last year in his public stock picks.

Well, it so happens that Kraft Heinz (KHC) is one of Berkshire's top holdings. In fact, Berkshire is the top holder of the stock by a considerable amount (click on image):

On Monday morning, Warren Buffett will be on CNBC to discuss his holdings of Kraft Heinz and the stock might react positively but my best advice is to stay away from this falling knife, let the dust settle before dipping your toe here.

And Kraft Heinz wasn't the only stock crashing today. Shares of Stamps.com (STMP) plunged more than 55% today after the company revoked the exclusivity requirement of its deal with the United States Postal Service, spurring the end of the partnership (click on image):

Again, don't bother catching this falling knife, it can go a lot lower.

These examples demonstrate the danger of taking single-stock risk, you just never know when you're going to wake up to really bad news and get blown out of the water.

Anyway, while shares of Kraft Heinz and Stamps.com got clobbered, the broader S&P 500 is off to a great start of the year (click on image):

As shown above, the SPDR S&P 500 ETF (SPY) crossed above its 50-week moving average and if this momentum continues, it might make a new high.

What is interesting to me is while the S&P 500 is up over 11% YTD, the leading sectors are cyclical sectors like Industrials (XLI) and Energy (XLE) followed by Technology (XLK).

The table below which is available on barchart here gives you the year-to-date performance of the S&P500 sectors (click on image):

You will also notice the bottom three sectors are all defensive, namely, Consumer Staples (XLP), Utilities (XLU) and Healthcare (XLV).

So what's going on? Why are defensive sectors lagging the market and cyclical ones leading it? Is the economy so strong that investors are quietly a lot more optimistic?

I don't think so, in fact, I believe we are at the tail-end of the US economic expansion and things will cool over the next two years.

We are still in the first quarter and there are over ten months of market action left before we close the year out, so I would definitely sweep the table here and start positioning my portfolio more defensively going into Q2 (these sectors might continue to outperform in March).

I had a chat with a friend earlier who was telling me he's been looking at the Commitments of Traders Reports every week and he noticed  while leveraged funds are still net long on stocks, gross exposure has come down significantly which tells you they're not willing to leverage themselves too much because they fear getting caught here. The same goes for investment banks.

I told him that CTAs went long a few weeks ago but the truth is most funds and big trading outfits aren't going to increase their gross exposure (leverage) until there is a catalyst propelling stocks higher or lower.

Right now, there's too much uncertainty out there. Trade talks with China might falter, Brexit looks worse with each passing week, and probably most importantly, the US and global economy are slowing as the lagged effects of all those rate hikes are starting to bite. You see it in interest rate sensitive sectors like housing.

However, even there, there is some good news. Look at the S&P Homebuilders ETF (XHB) quitely rallying from very oversold levels in late December and crossing above the 50-week moving average (click on image):

Call me skeptical but I don't see this rally continuing, it's as if the market thinks the Fed is done raising rates for good and the economy will continue surprising us to the upside.

The other important chart I want to show you is the US Long Bond ETF (TLT) which is a price index (click on image):

If things are so great, why aren't US long bond yields surging higher and long bond prices plunging (bond yields are inversely related to bond prices)?

My answer to this dilemma is that global asset allocators are derisking their portfolios and buying more, not less US long bonds.

And this is happening at a time when emerging markets shares (EEM) are rallying, signalling global growth is stronger than expected (click on image):

No wonder energy and industrials are rallying so much year-to-date but something tells me this rally in cyclical shares will not be sustained going into Q2. When in doubt, I follow the bond market's lead and position myself accordingly.

Anyway, tread carefully here, some of these countertrend rallies are very powerful and can fool you, but that's all they are, countertrend rallies.

I'll end it there. I hope you enjoyed reading this comment and all the others I posted this week. 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.

If you are looking for more details on US stocks, I invite you to look at several things:
Below, you can see this week's large cap advancers and decliners (click on images):

Below, Joe Zidle, investment strategist at Blackstone, Richard Bernstein of Richard Bernstein Advisors, and Doug Cohen, portfolio manager at Athena Capital Advisors, sit down with "Squawk Box" to discuss how a U.S.-China trade deal might affect the markets. The panel is also joined by CNBC contributor Michelle Caruso-Cabrera.

And Ben Emons, Medley Global, on whether global growth fears are overblown. CNBC's Seema Mody and the Futures Now traders, Jim Iuorio at the CME and Anthony Grisanti at the NYMEX discuss.

Third, Tom Porcelli of RBC Capital Markets and Krishna Guha of Evercore ISI discuss the market's reaction to the Fed's semi-annual monetary policy review. Guha thinks we won't get good news on trade across fronts and interestingly stated the Fed is far more worried about falling inflation.

Lastly, CNBC's Leslie Picker reports on the latest SEC filing from Warren Buffett's Berkshire Hathaway, detailing the stocks it bought and sold during the fourth quarter of 2018. There are some surprises.