Equities Rally Is Global

Market Stays Overbought

Wednesday was the reverse of Tuesday. On Tuesday the S&P 500 was the only major index that fell. And on Wednesday it was the only one to increase. S&P 500 was up 7 basis points on Wednesday. VIX fell 0.48 to 12.62 which signals high complacency. Stocks are up modestly since investors started calling for a correction. They are up slightly more than 1%. 

If they increase much further it will make the call worthless. Opportunity cost approaches the potential losses in a correction. If we were calling for a 20% decline, even a 7% rally before the correction wouldn’t be a problem. This is why it’s tough to forecast mini corrections. Timing needs to be really good.  

CNN fear and greed index still suggests a decline is coming as the index fell 1 point to 88 which is extreme greed. It’s a decent idea to lighten up your risk when the index is at extreme greed. It doesn’t always work, but it has a good track record on average.

Rally Isn’t Just In America

MSCI ACWI was down 5 basis points on Wednesday, but it has done well recently. It is very close to its record high. The American market is no longer the only one rallying. 

As you can see from the chart below, the percentage of the 49 markets within the ACWI with rising 200 day moving averages is at 73.5%. Even though we’ve still been seeing weak global economic data, markets are already pricing in a recovery. 

By the time we see the recovery, over 80% of markets will likely have rising 200 day moving averages. There will still be some gains left to be had, but you will have missed out on a lot if you wait for an all clear sign. Obviously, if the all clear sign never comes, there is plenty of room for markets to fall. Especially the American market which has had a fantastic year.  

Energy Falls & Healthcare Rallies

Nasdaq fell 0.29% and the Russell 2000 fell 0.63%. Small banks fell 0.55% and large banks rallied 0.51%. Decline in yields hurt small banks. Because yields fell, the utilities and real estate rallied. They were up 0.26% and 0.41% respectively. 

Worst sector by far was energy which fell 2.29%. It was hurt by the negative headlines surrounding trade. Latest news is that phase 1 of the trade deal might be delayed until December. Europe is expected to be the venue where the agreement is announced. Since we don’t know the specifics of the deal or how negotiations are going other than from second hand reports, this type of news is viewed negatively. It’s possible there has been a snag in negotiations.

The longer the delay, the more time for something to go wrong. December 15th is the absolute deadline. That’s when the next round of tariffs on China goes into effect. Many expect the deal to be announced close to that deadline. Politicians love to delay big decisions as long as possible. There will likely be some type of deal done this year because both sides need their economies to recover. Plus, President Trump has an election in 12 months.

Best sector on Wednesday was healthcare which increased 0.56%. Latest PredictIt odds have Warren with a 33% chance of winning. Biden has a 23% chance, Mayor Pete is at 20%, and Sanders is at 14%. Mayor Pete’s odds are at a record high. That’s probably because he has recently polled well in Iowa. If he wins Iowa, he can gain some momentum in national polls. 

Biden is in 4th place in Iowa and in 2nd place in New Hampshire (according to the average of recent polls). If he loses both states, he could lose the moderate mantel to Mayor Pete. There’s also a possibility the first 2 states don’t matter. Mostly because Biden is polling really well in South Carolina which is the 3rd state to vote. Specifically, in the latest Iowa poll, Warren is at 20, Pete is at 19, Sanders is at 17, and Biden is at 15. 

In the latest New Hampshire poll, Sanders is at 21, Warren is at 18, Biden is at 15, and Buttigieg is at 10.

No Rate Cuts In 2020?

Since its recent peak at 1.86%, the 10 year yield has fallen 6 basis points. Personally, I can see it falling a bit if there is a correction in stocks. But in the intermediate term, I see it hitting 2%. 10 year yield was driven lower by the same thing that drove energy stocks down, falling oil prices. 

On Wednesday, WTI oil fell 88 cents or 1.54% to $56.35. 2 year yield is at 1.6%. I can’t see it increasing as much as the 10 year yield. Fed has stated it won’t hike rates unless inflation spikes. In other words, the Fed probably won’t hike rates in 2020 even if the economy begins to recover.

Because I see a recovery in the next few months, I don’t think the Fed will cut rates in 2020. Next move might be a hike in 2021. There is currently an 11.1% chance of a cut in December. Also, there is a 66.2% chance of a cut by the end of next year. 

Fed funds futures market has a terrible track record when it comes to making predictions further along than the next couple meetings. I see the odds of a cut falling as we get deeper into 2020.

Conclusion

Stocks haven’t moved much in the past 2 days. But don’t let the market lull you to sleep because it is still very overbought. This has been a global rally as investors price in the central banks’ stimulus working to boost the global economy. 

A trade deal with China can also help the global economy. Apparently, it might happen in December in Europe. There is almost no chance of a cut in December. And I don’t see a cut happening next year either. 

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