Another Flat Day For Stocks
S&P 500 was flat again on Tuesday as it fell just 5 basis points. The market has been flat most days in the past few weeks with the occasional sharp rally. You’d think markets would have more to react to since the economy is very weak and expectations are for a big turnaround. There should be a turning point in the economic data in the next few weeks for 2020 to be a strong year. However, markets are yawning at the data and even not paying much attention to the recent negative news on trade.
On Monday a CNBC reporter tweeted, “Mood in Beijing about #trade deal is pessimistic, government source tells me. #China troubled after President Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support.”
A big problem with negotiations is Preseident Trump seems to really want a deal before the November election. And China sees that so it doesn’t want to give in at all.
Stocks Remain Overbought
Since the stock market hasn’t fallen from its record high, it remains overbought. CNN fear and greed index fell from 83 to 80 which is still extreme greed. This index reverts back to 50 if there aren’t big moves in the near term even if stocks never correct. This index is about sentiment, not valuations.
VIX was up 0.4 to 12.86 which means its streak of being below 15 continued. It has been below that for 27 trading sessions which is the longest since last fall right before the big 20% correction. Nasdaq was up 0.24% and the Russell 2000 was up 0.37%.
As you can see from the chart below, the 14 day RSIs for the S&P 500, Nasdaq, Dow, and Wilshire are all above 70. Only the Russell 2000 isn’t very overbought. As of Monday, the S&P 500’s 14 day RSI was 75.2 which means the market is very overbought.
America Has Outperformed Global Markets
MSCI all country world index fell 12 basis points. Meaning, we need to wait at least one more day before it breaks its previous record high made in January 2018. For a quick moment foreign stocks were doing better than S&P 500, but the U.S. market has been hot lately.
As you can see in the chart below, this isn’t a new trend. International has lagged America for a few years. Bad news for U.S. stocks is rolling 10 year relative returns show that the lag is almost as big as the late 1990s. That was right before the tech bubble burst and there was a very bad bear market. S&P 500 might not fall 50% in the next few quarters, but the U.S. might not be the place to be over the next 5-10 years.
Big Change In Dem Race Ahead Of Debate
Biggest loser on Tuesday was energy which fell 1.47%. And the biggest winner was healthcare which rose 0.65%. Healthcare should love that Pete Buttigieg is doing well in the Iowa and New Hampshire polls since it means Warren isn’t. It appears Warren’s momentum is long gone. That doesn’t mean Buttigieg’s momentum is here to stay. We have a long time until the first votes. It’s not the ideal time to peak yet.
In the latest New Hampshire poll from St. Anselm, Buttigieg had a 10 point lead on Warren and Biden as he was at 25%. This poll could be wrong though as he’s never led a New Hampshire poll before. This poll is way different from the CBS/YouGov poll from a week ago.
St. Anselm poll has Warren with 16 fewer points, Buttigieg with 9 more points, and Sanders with 11 fewer points. This poll caused Buttigieg’s betting odds to win the New Hampshire primary increase to 30%. He’s now the front runner to win both New Hampshire and Iowa.
Buttigieg’s major problem is with African Americans. Let’s see if he gains any steam in the south if he wins both states. The November 20th debate will be a big test for him as he’s now one of the 4 front runners.
Home Depot Stock Tanks On Lowered Guidance
With the last few firms reporting their Q3 earnings, we’ve seen weak results from retailers. Home Depot is the latest example despite the improvement in the housing market. The firm reported $2.53 in EPS which beat estimates by 1 cent. Revenues were $27.22 billion which missed estimates by $310 million.
Same store sales growth of 3.6% missed estimates for 4.7%. Its stock fell 5.44% on Tuesday because the firm lowered its lowered guidance. Guidance for fiscal year sales growth fell to 1.8% from 2.3% and guidance for fiscal year same store sales growth fell from 3.5% to 4%.
The firm didn’t miss expectations and lower guidance because of the economic backdrop which is good news for the rest of the market. Home Depot blamed its spending on improvements to IT systems, stores, and the supply chain. This was an unforced error. CEO Craig Menear stated the process of improving the company’s digital systems “has proven to be more complex than originally anticipated.
An Oppenheimer analyst stated, “The backdrop of home improvement was quite good. The lumber price issue is not as big a deal anymore, weather has been favorable and then we have this, what I have been really been excited about, is this improving overall housing environment.” Even after the decline on Tuesday, the stock is still up 31% year to date as investors have predicted this housing market improvement for the past few months.
Conclusion
Stocks remain overbought. The U.S. stock market has been outperforming the rest of the world for years. Healthcare has been rallying for the past few weeks because Warren has been dropping in the polls.
Let’s see if the debate on Wednesday impacts the polls. There will be 10 candidates on stage. Only 4 have a reasonable chance to win. Home Depot stock cratered on weak earnings, but its stock has still had a great year and the housing market is still improving.
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