Another Record High As Overbought Market Breaks An Indicator

Another Rally: Solid Jobs Report Awaits

Predictions for a correction in January have proven to be wrong. Especially so far as the market rallied again on Thursday to a new record high. S&P 500 has rallied on each of the past 4 days prior to the non-farm payrolls report. The table below shows the estimates for the report. 

Manufacturing job creation will be weak, but overall job creation will moderately beat estimates. Experts predict about 175,000 jobs added. Keep in mind, that a solid jobs report doesn’t necessarily mean stocks can’t correct later this month. Good news for the bulls, however, is that investors aren’t worried about inflation. Therefore, strong wage growth probably won’t cause stocks to decline even though margins have been falling.  

Review Of This Very Overbought Market

The stock market continues to be overbought. It probably makes many investors want to ignore such signals because they haven’t worked. Percentage of the market that’s sold short is the lowest since early 2018. As you can see from the chart below, the NDR trading sentiment index is still above 62.5 which has led to declines since 1995. As the bottom right chart shows, since 2017, this index hasn’t worked. 

Gains are about the same when the market is oversold, neutral, or overbought. That’s because 2017 and 2019 were amazing years. In the past 3 years, only Q4 2018 caused any trouble. VIX was down 0.91 to 12.54. CNN fear and greed index was up 1 point to 93 which is extreme greed. It seems to be permanently in greed/extreme greed territory; that isn't normal. 

2020 has started off looking a lot like a continuation of last year as the S&P 500 is already up 1.36% year to date. Many called for only a 4% gain all year. However, it’s notable that 2018 started off strong before stocks cratered later in January and February. 

January is used as a key tell for total year performance. If the stock market is up in the last 5 days of the year and the first 2 days of the new year, the first 5 days of the new year, and in January, average returns are 21.3%. Stocks increased 29 out of 31 times that happened. Technically, just increasing isn’t a big deal. But with my prediction of low returns, I wouldn’t claim there is a 94% chance stocks will increase this year.

Earnings Update

Q4 EPS estimates cratered in the past few months. However, earnings results look better than last quarter. With the first 19 firms reporting results, 13 of 19 had their Q1 estimates cut as estimates fell 1.62% on average. While that sounds terrible, last quarter, those same firms saw their Q4 estimates cut 3.7% as 16 of 19 had them cut. Early earnings reports are a great signal of how earnings season will go. 2020 earnings will likely be solid, but I don’t see stocks increasing as much as earnings.

Apple Drives Tech Up Yet Again

Short bets on Apple have been wrong. It’s shocking to see the world’s biggest company attract this much speculation. This shows you can find alpha even in the most followed names. Apple’s 2.12% rally helped the Nasdaq increase 0.81%. Russell 2000 was up just 8 basis points. Every single sector was up. Tech sector was the best performer because of Apple. It increased 1.13%. 

Apple’s Chinese iPhone shipments were up 18.7% yearly in December which equates to about 3.18 million units. Apple had strong market share growth as overall smartphone shipments were down 13.7% in China. Apple’s iPhone 11 did well as its great camera and $50 price cuts worked wonders. Question is if Apple can sustain this success without a 5G device. It also might struggle to get services past Chinese government censors.

Another Weak Report By A Non-Top Tier Retailer

Following Beth Bath & Beyond’s weak report, Kohl’s reported weak holiday shopping sales which sent its stock down 6.54%. Its stock had already been down 28% in the past year heading into that session. It's likely Wal-Mart, Target, Amazon, and Costco took market share. 

The firm stated November and December same store sales growth was only -0.2% because of weakness in core women’s apparel (Target sole share in women’s apparel). Kohl’s stated fiscal year 2019 EPS would be towards the low end of its guidance range which is $4.75 to $4.95. It just lowered its guidance in November. Similar to Bed Bath and Beyond, this company is in a tailspin.

Macy’s Sales Fell Too

Macy’s holiday results came out Wednesday. Its same store sales fell 0.6% in November and December which actually beat estimates for a 1.75% decline. This caused its stock to rally. Unfortunately, its decline on Thursday canceled that rally out. 

Investors were 2nd guessing buying a stock with falling sales. Macy’s announced it would close 28 Macy’s stores and 1 Bloomingdales. Overall, department store sales growth was -1.8% from November to Christmas Eve according to Mastercard’s Spending Pulse. I wouldn’t buy a retailer with declining sales just because it took market share. Sometimes you need to hold your nose and buy the winners. Target, Wal-Mart, and Costco are up 43.86%, 3.88%, and 10.32% in the past 6 months.

Conclusion

Stocks have done so well they broke the sentiment indicator. Many are calling for a correction. But I think the jobs report will be fine. Apple had strong iPhone sales in December in China. Bed Bath & Beyond, Kohl’s, and Macy’s had negative same store sales growth. 

Target, Wal-Mart, and Costco will likely have strong sales growth. Amazon’s retail business should do well. Its cloud service is being pressure by Microsoft’s Azure. I’ll be following earnings season closer next week. But so far Q4 looks better than last quarter in terms of estimate cuts.  

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