Apple Drives Market Near Its Record High As Trade War Cools

Stocks Near Record High

The overall market rallied on Wednesday and small caps outperformed again. S&P 500 was up 0.72% to 3000.93. Its record closing high is 3,025.86. A record high is coming soon. Once again, the market rose sharply in the last 10 minutes of the trading session as it was up 0.2%. It closed at the high of the day. 

CNN fear and greed index rose 2 points to 57 which signals greed. This is the first greed signal since July. It supports my point that the correction is over. Furthermore, the VIX fell 0.59 to 14.61. There is little volatility despite the fact that the economy is in a slowdown. Investors agree with me that a recession isn’t around the corner. Obviously, that can all change in a couple weeks.

Tech Stocks Rally With The Help Of Apple

Predictions on Apple stock hitting a record high based on its announcement on Tuesday looks close to being accurate. It rallied 3.18% to $223.59. It’s about $4 away from its record. Apple’s rally helped the Nasdaq increase 1.06% and the tech sector increase 1.01%. Tech and healthcare were the dual best performing sectors on Wednesday.

As you can see from the chart below, Apple wasn’t the only reason the tech sector did well as the Philadelphia Semiconductor ETF rallied 1.5% hitting its highest level since July 30th. The SOXX ETF is up 12.91% since August 5th. ETF is near its double top level as it peaked at $215.69 on April 24th and $220.43 on July 24th. Semiconductor industry is highly cyclical and international which implies investors are betting on an end to the global slowdown.

Small Cap Banks Rally Again: An Epic Run

Even though treasury yields only increased slightly, small cap banks increased and real estate fell. Real estate sector was the only loser on the day as it fell 0.32%. KBW regional bank ETF increased 1.2%. It has been on an epic run as it is up 11.7% since August 27th. That’s only 10 trading sessions. It outperformed the financial sector in the S&P 500 again as the XLF was up 0.57%.

This rally in small cap banks partially explains the Russell 2000’s increase of 2.12%. The index has been on an amazing run as it is up 8.22% since August 27th. It’s playing catch-up as it never surpassed its May high. Russell 2000 has beaten the S&P 500 by 3.81% this week. 

That would be the best weekly outperformance since the week ending November 11th, 2016. This market looks a lot like November 2016. Politically, you can say the 2016 presidential election is like the potential trade deal. Economically, you can say both marked the end of slowdowns. 2 obvious problems are that there hasn’t been a trade deal yet and there isn’t much evidence the economic slowdown is over.

Similar Selloff In Treasuries To 2011

There wasn’t a big selloff in treasuries on Wednesday like there was in the first 2 days of the week. 2 year yield was flat at 1.67%, the 30 year yield increased 1 basis point to 2.22%. And the 10 year yield rose 1 basis point to 1.74%. 10 year yield is now 7 basis points above the 2 year yield. Steepening is slightly concerning, but it all depends on how sustainable this selloff in treasuries is. If this is the start of something greater, more steepening will occur. If this is a trend correction, the curve will stay flat.

The chart below shows an analogy to the past few months of action in the 10 year yield. The 2011 bull run is like the 2019 run. There was a 60 basis point increase in October of 2011 which is similar to the recent increase. If the correlation continues, yields will fall in the near term after this selloff peters out.  

Fed’s rate decision next Wednesday and the latest PPI report are impacting treasuries. Because of the selloff in the short end of the curve, there is now only an 88.8% chance of a rate cut in September. It will still occur, but the situation is slightly more interesting. 

Usually, there isn’t big movement in odds right before the meeting. There is now only a 24.8% chance the Fed cuts rates at least 3 more times this year. Those odds were 46% on September 4th. The most likely scenario is a cut in September and a cut in October or December.

Core PPI Increases

August PPI report may have prevented a rally in treasuries on Wednesday because inflation increased. This PPI reading presents a modest challenge for the Fed which is about to cut rates. I say modest because core PCE inflation is still below 2% and will likely stay there for the rest of the year. 

Specifically, headline yearly PPI was 1.8% which met estimates and increased from 1.7%. As you can see from the chart below, core PPI increased from 2.1% to 2.3% which beat estimates for 2.2%. Finally, core PPI less trade services increased from 1.7% to 1.9%.

Good News On Trade

The trade war is improving quickly as China and President Trump are set to meet next month. First there was a report that China is sparing a few American goods from tariffs. They include cancer drugs, lubricants, pesticides and shrimp meal. Trump took kindly to this olive branch. He tweeted, “on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%), from October 1st to October 15th.”

This 15 day change is virtually meaningless to the economy, but it matters because it signals the negotiations are going well. If both sides are ready and willing to make a deal, the outline of one can come out of the October meeting. I have been expecting a deal by December, so this makes sense. President Trump’s tweet was after hours, but the stock market sniffed it out early by rallying on Wednesday. 

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