A Perfect Storm Is Brewing

|
Posted: Jan 23, 2018 9:25 AM
A Perfect Storm Is Brewing

Once again, the market gained strength throughout the session, triggering more panic-buying into the close. Even though the market opened indecisively on Monday, the energy was strong all session long after major earnings beat by Haliburton (HAL). 

Consequently, the Energy (XLE) sector soared more than 2% for the session, up 8% for the year and 20% in the past six months, but less than 5% higher for year-to-year.

These stocks trailed the big rebound in crude oil last year, and are now playing catch-up.  Everyone that follows me should have exposure to oil stocks.

Popular Delusions

With so much chatter with popularity polls about the President and the economy, it is interesting that many observers see a bullish sentiment among individual investors to be a harbinger of bad things. The idea is that crowds are more likely to be wrong; the larger the crowd is, the more insanely incorrect their assumptions will be.

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds explained the various ways that groups think, and how it can lead to disaster in three parts:

  • National Delusions
  • Peculiar Follies
  • Philosophical Delusions

The book chronicles several famous bubbles; including the Dutch Tulip craze and South Sea Company stock scam that cost Sir Isaac Newton his fortune. The assessment is that the masses always get it wrong, and I don’t think that’s correct.

Investor Bullishness

The investor confidence, as measured by the American Association of Individual Investors (AAll) has been above 50% in four of the last five weeks; more than likely, it will remain elevated, and perhaps move even higher. For many experts, this is surely a sell signal, but the experts have been missing the rally.

Yesterday, Citibank (C) upgraded U.S. Steel to ‘neutral’ from ‘sell’ something of an admission that they were completely wrong on this stock which also means being wrong on macroeconomic modeling as well.  I’m not saying the stock isn’t a buy (although the firm stopped short of that rating) here but it’s up more than 400% since January 2016 and 100% from May 2017.

It’s true investor optimism elevated above 60% when the old tech rally hit its first speed bump in November 2000, and even higher at 63.5% when the wheels began coming off in May 2001. However, bullishness was muted when the recession began in 2007 and the market peaked in 2008.

Moreover, for most of this rally, individual investors haven’t been over exuberant, but they haven’t hated this rally like the experts have. It’s the mavens that are playing catch-up now.

Anatomy of Hot Session

Midway through the session, the market picked up steam as it became clear the government shutdown would last just one weekday. There were other factors, including a leak of the White House infrastructure plans.  

Axios Media posted the six-page outline that discussed grants and private activity bonds; covering transportation, water infrastructure, VA facilities, and land revitalization and rural projects.

NAFTA

Today begins the sixth round the North American Free Trade Agreement (NAFTA) negotiations. Things aren’t looking too good for the trade agreement between the United States, Mexico, and Canada. Although most of the chatter says the deal is doomed; for the most part, shares of companies with the greatest exposure to the deal actually traded higher.

But after the bell, there was a shot across the bow from the White House.  Following a unanimous recommendation from the United States International Trade Commission in November, the White House took action to impose tariffs on foreign-made washing machines and solar cells to protect America jobs. 

Of course, this is great news for shareholders of First Solar (FSLR) and Whirlpool (WHR).

After the close, Netflix (NFLX) crushed it again. NFLX posted financials for the fourth quarter. The company achieved record net additions of 8.3 million +18% from a year ago, and two million more than management guided. Those shares are rocketing higher.

TD Ameritrade (AMTD) also posted results that saw records for client trades per day and client assets.  Investors are excited as they should be.

Today’s Session

We are entering the thick of earnings season with very high expectations for big beats and strong guidance. Let’s watch how things shakeout.