24 Days Without Back To Back Losses

Still Overbought

The stock market fell 0.2% on Veteran’s Day and increased 0.16% on Tuesday which means it is still overbought. S&P 500 would have been up more on Tuesday if it wasn’t for President Trump’s comments on trade. That briefly put the S&P 500 in negative territory in the afternoon. Stocks recovered in the last hour, but they didn’t claw back all the gains from the morning. 

VIX was down 0.01 to 12.68 which is still very low. There is a record short position in the VIX futures market which signals investors are getting overconfident. CNN fear and greed index fell 1 point to 88 which is still extreme greed. The chart below shows the S&P 500 equal weight index and the percentage of stocks in the index that are overbought. 

As you can see, in the past couple of years, it has generally been a bad sign for more than 15% of S&P 500 stocks to be overbought. Recently, this hit about 20% which might be a correction signal. I’ve been wrongly expecting a 5% correction for a couple weeks.

Since the stock market increased on Tuesday, it avoided its first back to back down day in 24 days. This is tied for the longest streak since August 2015. It hasn’t had 25 day streak since early 2012. We'll all be looking to see if there are any back to back down days in the next couple of weeks. Actually, I highly doubt this streak gets above 30 days because of how overbought the market is.

Detailed Look At Tuesday’s Action: Healthcare Rises On Iowa Poll

Dow was exactly flat for the first time since 2014. There have been 4 exactly flat days since 2000. This is stock market trivia. It doesn’t mean much. However, it is exemplary of the lack of volatility recently. Nothing seems to phase this market. 

Earnings season won’t be a bother because it’s basically over. 454 S&P 500 firms have reported results which is 91% of the index. 73% have beaten estimates on non-GAAP EPS growth of 3.33%. And 56% have beaten sales estimates on 4.95% growth. It looks like Q4 2019 will be a terrible quarter for GDP growth. But it won’t be as bad for EPS growth as it faces easier comps.

Nasdaq was up 0.26% and the Russell 2000 was up 2 basis points. Worst 2 sectors were energy and real estate which fell 0.59% and 0.8%. Utilities sector is due for a bounce. As you can see from the bottom chart below, the RenMac Oscillator is below -3 which means the utilities index is oversold. This sector was up 0.25% on Tuesday.

Best sector was healthcare which loved the recent Iowa poll that showed Buttigieg leading. It rose 0.58% as a Monmouth poll showed Buttigieg at 22 points which gave him a 3 point lead over Biden. An average of the 3 recent polls has Warren up by 0.3% over Buttigieg. This is a 4 horse race in which Buttigieg has a lot of momentum. 

He gained 14 points from the last Monmouth poll in August. Now he is the favorite to win the Iowa Caucus as his odds are 33% and Warren’s are 32%.

Even though the long bond is oversold, it hasn’t moved much in recently. Of course, the bond market was closed Monday, so that gave it one less day than stocks to move. 10 year yield is at 1.92% and the 2 year yield is at 1.66%. That makes the 10-2 difference 26 basis points. 

The yield curve has been steepening in the past few weeks. It’s still relatively flat though. There is a 49.1% chance of a rate cut in 2020. A cut would sharply steepen the curve, but I doubt any action will occur.

As you can see from the chart below, the net percentage of fund managers expecting a steeper yield curve is about 60%. It’s near were it was before the past 2 acceleration points in this expansion. 2014 and 2017 were great years for the economy. The yield curve and other markets are expecting 2020 to be another great year. 

10 year treasury is probably expected to see higher yields before the Fed even thinks about hiking rates. There is literally a 0% chance of a hike next year. As the chart shows, the expectation for a steepening curve has been correlated with the Russell 2000 outperforming the S&P 500. 

That’s because the Russell 2000 has a higher financials weighting. When the market starts to expect the Fed to hike rates, the Russell 2000 will hit a new record high.

Update On Trade War

Rhetoric on trade has moved back and forth for about 2 years. Latest swing is negative. President Trump’s speech at the Economic Club of New York sent stocks modestly lower on Tuesday afternoon. In his speech he stated, a deal with China “could happen soon” as phase one of the trade deal is “close.” 

Stocks fell because of the negative rhetoric which suggests negotiations are ongoing rather than near completion. President Trump stated, “if we don’t make a deal, we’re going to substantially raise the tariffs.”

Many don’t expect the negotiations to fail and there to be new tariffs. But if that happens, the S&P 500 will probably fall 10%. That would be a big hit to consumer spending this holiday shopping season. 

Consumers don’t like higher costs and falling asset prices. Investors were also disappointed in the lack of specifics on the trade deal. But most didn’t expect him to divulge them at a relatively unimportant venue.

Conclusion

The stock market is overbought. CNN fear and greed index is signaling extreme greed and the S&P 500 hasn’t fallen on back to back days for 24 days. I’m looking for a 5% correction soon. Even though phase 1 of the trade deal is likely to be ratified in the next 4 weeks. 

Spread the love

Comments are closed.