Stocks Enter March Madness?

Fred Imbert of CNBC reports, Stocks post 5-day losing streak, notch worst week of 2019 after anemic jobs report:
Stocks fell for a fifth straight day on Friday after the U.S. government released employment data that badly missed expectations, adding to growing concerns that the global economy may be slowing down.

The Dow Jones Industrial Average pulled back 22.99 points to 25,450.24 as Exxon Mobil and Pfizer lagged. The S&P 500 fell 0.2 percent to 2,743.07 as the energy and consumer discretionary sectors declined. The Nasdaq Composite slid 0.2 percent to close at 7,408.14.

Equities fell sharply at the start of the session before paring losses. At its low of the day, the Dow was down 220.77 points while the S&P 500 had lost nearly 1 percent.

The indexes posted their biggest weekly declines of the year. The major indexes all dropped more than 2 percent this week. The Nasdaq snapped a 10-week winning streak, while the Dow notched its second weekly decline of the year.

The U.S. economy added just 20,000 jobs in last month, marking the weakest month of jobs creation since September 2017. Economists polled by Dow Jones expected a gain of 180,000.

“February’s anemic 20,000 new jobs will inevitably exacerbate widespread fears of slowing economic growth, making it harder to be optimistic about corporate earnings,” said Alec Young, managing director of global market research at FTSE Russell. “All in all, there’s little in this report to excite investors.”

The data come amid growing concerns about the global economy possibly slowing down. Data out of China showed its exports slumped 20.7 percent from a year earlier, far below analyst expectations and wiping out a surprise jump in January.

Analysts cautioned that data from China at the beginning of the year may be distorted by week-long Chinese New Year public holidays, which started in early February this year. In 2018, Chinese New Year holidays started in mid-February.

The weak data all come less than 24 hours after the European Central Bank slashed its growth forecasts for the euro zone and announced a new round of policy stimulus.

“Most investors would agree we are late in the cycle,” said George Schultze, founder of Schultze Asset Management. “Having said that, GDP growth remains pretty solid. We’ve had about 10 years of solid growth. … There are also a lot of things pushing it along, including accommodative monetary policy.”

Friday’s losses come amid growing fears that most of the positive news on the U.S.-China trade front may be baked in. At this point, most investors expect the two countries to strike a trade deal later this month. There are also worries that a deal may not be sure thing.

CNBC learned through sources that China and the U.S. have talked about holding further discussions in Beijing after the National People’s Congress concludes on March 15. This was first reported by The New York Times.

“A pullback in risk assets was needed, but underlying technical and fundamental conditions are positive,” Peter Perkins, partner at MRB Partners, wrote in a note to clients. “The global growth outlook remains mixed, but there are signs that economic growth momentum in China and the euro area is bottoming, while the U.S. economy continues to chug along at a moderately above-potential pace.”
Last week, I discussed whether a bubble in stocks is brewing and said even though it's unlikely, with the Fed out of the way for now, you can't discount the possibility and some red hot sectors like biotech were getting bubbly.

In fact, this is what I stated:
My own view is following a disastrous Q4, it was a time to make stocks great again, and the world's most influential allocators stepped in and rebalanced their portfolios into equities. When the Fed hit the pause button, they bought more equities.

Now we are at a point where people are wondering, with the Fed out of the way, for now at least, are we going to have another bubble in stocks like 1999?

As it stands, I wouldn't get too carried away but have a look at the year-to-date performance of the S&P500 sectors (click on image):

As you can see, the S&P 500 is up close to 12% and the leading sectors are cyclical sectors like Industrials (XLI) and Energy (XLE), followed by Technology (XLK) and Consumer Discretionary (XLY).

Conversely, the lagging sectors are defensive like Consumer Staples (XLP), Utilities (XLU) and Healthcare (XLV).

Importantly, if we are at the late stages of an economic rally, this isn't what you should be seeing, so either the stock market is high on cannabis stocks or the bond market has it all wrong.

But if you look at US long bond prices (TLT), they're rolling over here as yields back up (click on image):

Again, this isn't indicative of a global slowdown, quite the opposite, so maybe there is a renewed economic uptrend taking place.

Or maybe not, it could be just another buying opportunity for bonds and come the end of Q1 at the end of March, if we don't get any clear signs of a trade deal with China, I'm willing to bet the world's most influential allocators are going to rebalance yet again but this time take money out of stocks and into bonds.

It won't be a major rebalancing but enough to stall this impressive rally in stocks, so don't get too excited, nothing goes up in a straight line.
When stocks are up over 10% in two months, a lot of investors rebalance, locking in some gains, and wait for a better opportunity to reenter the stock market.

This is especially true in this environment where there's a lot of uncertainty over Brexit, China-US trade talks, etc.

This morning's US jobs report was abysmal, way below what most economists were expecting. In fact, it was a very weird report and it's hard to read too much into one month, but it's clear if this continues, it will confirm a US slowdown is underway.

What's even weirder, in Canada, we added 56,000 jobs last month, so either the BLS has it wrong or Statistics Canada has it wrong because these red hot Canadian job figures don't jive with a lot of headlines we are seeing in the news (I expect major downward revisions in subsequent Canadian jobs reports).

Anyway, back to the US jobs report. From the key takeaways, the weaker sectors of the job market last month included construction, mining and retail, while the healthcare and business services industries created jobs in February. Despite job creation stalling last month, figures from the two prior months were revised higher.

While a lot of attention has been given to the weak US jobs report, I don't think it had anything to do with the stock market's weak performance this week. Like I said, smart investors are locking in some gains, waiting for a better time to reenter the market.

After the surge in stocks in January and February, it's only normal we see a pullback as investors wait for a catalyst to send stocks and other risk assets higher (click on image):

Can US stocks go lower? Sure they can, especially in the short-run, but I wouldn't be surprised if this is just a pullback, for now.

Just like we need a catalyst to propel stocks higher, with the Fed out of the way, we need one to sink them much lower.

Can the S&P500 give back its gains from the first two months? Absolutely possible but I'm not convinced it will. Can it revisit December lows? It can if all hell breaks loose but again, with the Fed on pause mode, I don't see this as a likely outcome, at least not now.

Some think the Fed is getting wonky here, signalling the possibility of more QE and negative rates if needed:

Maybe that's what is unnerving investors but if this happens, it will only raise the risk of another stock market bubble down the road.

As far as I'm concerned, we're just entering March Madness, stocks will be choppy, you need to pick your spots carefully.

Have a look at the how the S&P sectors performed this week, courtesy of barchart (click on image):

As shown, the S&P 500 was down over 2%, Utilities and Real Estate were the only sectors posting gains, up 0.7% and 0.5% respectively, while Financials (-2.69%), Industrials (-2.86%), Energy (-3.86%) and Healthcare (-3.87%).

The outperformance of stable sectors like Utilities and breakdown in cyclical sectors like Financials, Industrials and Energy, is normal if we are entering a slowdown, but I'm a bit perplexed as to why healthcare stocks got slammed so hard.

Part of it is the biotech component as biotechs (XBI, IBB) got slammed this week, but the other part of it is maybe healthcare stocks are "feeling the Bern" of top Democratic presidential candidates calling for universal healthcare and calling for more regulations on big pharma and big tech.

I don't know, it's a bit weird but that's how these algo-driven markets are, very weird, it's hard to make sense of them when you analyze them rationally, especially over a short period.

Anyway, here are the top-performing US stocks for this past week, courtesy of barchart (click on image):

As you can see, even though the broader biotech indexes (XBI, IBB) didn't perform well this week, pulling back, some of the top-performers were small-cap biotechs.

I was tracking the action on one of them, Seelos Therapeutics (SEEL) as investors got very excited after Tuesday's announcement that the small biotech had exclusively in-licensed a family of peptide inhibitors from The Regents of the University of California.

The peptide inhibitors, which were developed by a research team at the University of California, Los Angeles, target the aggregation of alpha-synuclein. Alpha-nuclein is a major component of Lewy bodies, protein clumps that are a hallmark of Parkinson's Disease.

Anyway, the stock was up 70% yesterday and opened up close to 80% today on huge volume before ending the day up 11% (click on image):

No doubt, big biotech funds bought in but people are getting excited over nothing and if you look at the long-term chart of Seelos, you'll see that it's been a total disaster, but speculators hear about a licensing agreement and potential cure for Parkinson's and they jump all over it (I feel sorry for retail suckers who bought in at the open today).

We shall see what next week brings us but right now, I wouldn't get too nervous about the pullback in stocks this week, think it's perfectly normal.

Below, CNBC commentators discuss February's dismal jobs report.

Second, Chart master Carter Worth says the best bet investors can make is a retest of the market lows. As I stated above, with the Fed out of the way, we could see more of a pullback but I doubt we retest the lows of December.

And, as stocks see their worst week of the year, utilities just hit a new high while energy stocks got slammed. With CNBC's Scott Wapner and the Options Action traders, Carter Worth, Mike Khouw and Dan Nathan.

As I said above, the breakdown in cyclical sectors like Energy and outperformance of Utilities and other high-yielding sectors like Real Estate and Telecoms, suggests there is a slowdown happening and US long bond yields are headed lower.

In fact, Kyle Bass, Hayman Capital Management CIO, was interviewed by Brian Sullivan on CNBC earlier this week discussing everything from China to the Fed and he said "interest rates are headed back to zero in 2020." CNBC's Seema Mody and the Futures Now traders, Jim Iuorio and Jeff Kilburg, discussed whether investors should buy bonds over stocks (I'm still long bonds).