Despite Choir Of "Experts" Calling For Collapse, Markets Continue Their Determined Rally

|
Posted: Aug 20, 2018 11:00 AM
Despite Choir Of "Experts" Calling For Collapse, Markets Continue Their Determined Rally

Friday was an impressive session to cap off an impressive week for the stock market. It’s one that I think should give all fence-sitters a greater sense of urgency, while the financial media chased the Tesla story the way the paparazzi used to chase Madonna back in the day.

Elon Musk messed up, the Securities and Exchange Commission (SEC) will investigate, and we’ll wait for the results. From a broader market perspective, I’m interested in the rules covering news dissemination on social media. Of course, each day brings the possibility of spillovers from the media’s obsession with bringing down the White House.

The market is reacting a lot less to this Constitutional crisis, but maybe we could get a hiccup on the Manafort ruling. If so, it would be short-lived. The real action in the market has been this quiet, but determined rally in the face of a choir of experts calling for collapse. 

One day, the economy will shift into a recession, and the market will enter bear territory, and so many folks will say: “I told you so.” Even those that missed the entire rally will somehow try to justify missing 20,000 Dow points.

Right now, there are so many folks with an axe to grind, or reputations to protect; they will never give credit to the economy, or the stock market. The following is a list of people & entities that need this thing to derail:

  • Wall Street Mavens
  • Short Sellers
  • Economic Purist (because it’s a settled science)
  • Political Opponents
  • Industrialists
  • Globalists

I happen to be thrilled the economy is coming on strong and showing flashes of greatest we thought were relics of a bygone era, as we were told the compensation would be cheap goods and foreign ownership of American businesses.  I don’t mind investments. I just would prefer that it wasn’t my cash coming back to own assets that divert profits out of the country. 

America is open for business -and should be -but everyone with access to our market must give equal access to theirs.

Investors should be paying very close attention to the statement the market is making, even if it’s doing so against the backdrop of slow summer sessions.

Last Week

Let’s start with Friday right before the opening bell. The only question is: could Friday’s selling be capped on an otherwise idyllic summer session?

Semiconductor Stocks Must Stop Slide

Technology stocks (XLK) were weighed down by guidance disappointment from Nvidia (NVDA) and Applied Materials (AMAT). These semiconductor plays represent the new hot spots such as gaming and cryptocurrency to old-school computer chip manufacturing. 

Both are components of the Philadelphia Semiconductor Index (SOX), which has struggled in recent months, in part to some high-profile downgrades.

The SOX is right at the bottom of its trendline and must hold.

Then there’s the big earnings miss at Deere (DE), which missed Wall Street consensus, sending the share price into freefall. 

I read the release, but I couldn’t listen to the conference call. I am not sure what turned it around, but in a blink of an eye, the shares were powering higher. The stock had a $10.00 trading range.

The move in the stock coincided with a rebound in the Dow Jones Industrial Average, which saw the index move solidly into the plus column by 11:00 a.m.

Investors followed the action, and slowly bid up the index until 2:00 p.m., when a combination of positive comments about a possible deal with Mexico broke at the same time the WSJ reported U.S. and China negations were putting in the guardrails to reach a trade deal in October.

By the close, those lazy summer doldrums returned, but several messages rang out loud and clear.

My Concerns

My concerns always include “all of the above,” which means anything that has derailed the market in the past must be considered. That said; however, the probability must be weighed along with current trends:

  • Market Breadth still worries me, and I would like to see the rally broaden out
  • The wayward Fed could be a problem; but hopefully, we’ll know more after Jackson Hole this week
  • Geopolitical Risks could trigger a series of military dominoes that impact the U.S. economy. I’m not as worried about an Emerging Market economic meltdown contagion to the United States. I am not saying it can’t happen- I remember the first time I ever heard of the Thai Baht, the currency of Thailand.

Messages of the Market

  • Resolve

While it does get frustrating to see headlines cloud fundamentals and factual trends, the market exhibited great resolve last week this entire summer, and since the low of early spring.

  • Rotation

I have to say one of my biggest concerns all year has been limited leadership, and whether the broad market could rally without the fabled big tech names that have dominated the action for so long. For the last couple of weeks, I kind of thought that moves into consumer staples was a pit-stop for big money. However, earnings from Walmart (WMT) underscored that beyond nice dividend yields, there could be big money made.

Speaking of rotation, even when nerves have been rattled, money hasn’t raced into gold, which was supposed to signal the start of the next calamity. In fact, the gold road was the Great Recession wave for a couple of years, but it has faded since 2011. Now, gold is nearing a key support point at 1,127.

  • Resolution

I know the experts keep telling us China has unlimited tricks up its sleeve to beat America in a trade war like devaluing its currency. That used to be the case; right now, it poses a dilemma, not unlike Scylla and Charybdis because consumer spending is the largest percent of China’s Gross Domestic Product (GDP) in history.

Moreover, the Chinese stock market continues to meltdown and President Xi Jinping must pay attention:

  • Shanghai -1.34%
  • Shenzhen -1.69%
  • Revenue

We know the bottom line moves the stock market’s needle, and earnings have broken out to an all-time high. There can be a lot of shenanigans at the bottom of the income statement. Top line growth has been robust as more businesses are able to pass on higher prices without derailing volume.

I think it’s time for investors to begin rebalancing their portfolios:

  • No FANG Ideas
  • Consumer Staples
  • Brick-and-Mortar Retailers
  • Chinese Stocks

Special Rotation Ideas

Retail

I say follow the earnings and follow management teams ahead of the Omni-Channel curve. 

  • Nordstrom’s (JWN) Target $67
  • Ralph Lauren (RL) Target $180

Consumer Staples

Soda Stream fetched a takeover at a level substantially higher than it might have a year ago.  This points to the notion there could be hefty premiums for consumer staples names.  I think SJM is a name that will get a bid soon.  Then, there are the names in the sector that are simply oversold.

  • JM Smucker’s (SJM) target $130
  • Church & Dwight (CHD) target $70

China Tech

Note: For the near term, these ideas will work better as trading vehicles, but fundamentally, once the dust settles on the US-China trade spat; these are names I think long term investors should consider.

  • Alibaba (BABA) target $220
  • Tencent (TCEHY) target $52