The Dow, Fed Chair Decision, and Tech Monsters

Dow Very Overbought

Stocks had a fantastic run on Friday. A sign of the times was how GE stock rallied in the face of disappointing results to close up 0.97%. EPS was 29 cents, missing the estimates for 49 cents and the full year guidance was cut from $1.60-$1.70 to $1.05-$1.10.  The S&P 500 was up 0.51% and the Russell 2000 - RUT was up 0.48%. GE helped the Dow rise 0.71%. As you can see from the table below, the Dow is the 9th most overbought since 1900 according to the 14 day relative strength index. The S&P 500 tied the record long streak for trading days without a 3% correction. While many bears will complain the market never goes down, why should it? The economic data has been largely positive and earnings are only temporarily weak this quarter because of the hurricanes. The overbought nature of the Dow probably means it won’t continue to rise at such a torrid pace next week unless tax reform is passed. However, this situation is different from what I described the Russell 2000 could do when it was overbought because the Dow has a lower beta. A flat market for a few days should bring the RSI to a level closer to normal.

President Trump Speaks About Fed Pick

For the first time in a few weeks, President Trump spoke about who he will pick to be the next Fed chair. It was a confusing statement because he at first seemed to give away who it might be and then said they were all in consideration. Maybe he did that to show respect to all candidates. He said “most people are saying it’s down to two -- Mr. Taylor and Mr. Powell. I also met with Janet Yellen, who I like a lot, I really like her a lot. So I have three people that I’m looking at, and there are a couple of others. I’d say I will make my decision very shortly.” I find it weird that he said what ‘most people’ are saying because it only matters what he says.

Before this statement it seemed like it was going to be Powell for sure. It now seems like it’s down to Powell and Taylor. It’s weird how he constantly praises Yellen after criticizing her so much in 2016. It may just be to calm the markets because there’s still going to be a transition period after he makes his choice where the Senate needs to confirm the nomination. I expect the confirmation to go smoothly if it isn’t Yellen or Cohn. Cohn would get criticized for a lack of experience. Even though President Trump now likes Yellen, many Republicans don’t so that would be an uphill battle as well.

The President also fielded the question about who would be the next vice chair to replace Stanley Fischer who recently stepped down. President Trump said he might pick whoever doesn’t get selected as Fed chair out of Powell and Taylor. My thinking is he picks Powell as chair because he’s a dove and Taylor as vice chair because he’s with Trump on limiting regulations. This is the point where I love the betting odds because only someone who has a great understanding of the various rumors would bet on this decision. The betting odds are the perfect summary of what is happening now. It’s not a perfect prediction of what will happen. Powell is at 55%, Taylor is at 25%, Yellen is at 21%, Warsh is at 13%, and Cohn is at 2%. At this point, I would be shocked if anyone, but Taylor or Powell were picked. As I said, I think it’s going to be Powell.

The chart below is a summary of the landscape. It shows the range of Fed candidates on a scale from dovish to hawkish. Besides the placing of Cohn as hawkish, I think this chart, relatively speaking, is accurate. I don’t see why Cohn is so hawkish if he doesn’t have much experience. He should be considered unknown. This chart perfectly surmises why Powell will be picked. It makes the probability seem obvious all along. The reason why I was high on Warsh was because I didn’t know Powell was being considered before September.

Technology Rising

Next week is a big one for tech as Amazon, Alphabet, and Twitter report on Thursday. That’s shaping up to be an important day as it’s the same day the ECB decides on QE for 2018. Technology isn’t only doing well in America. As you can see from the chart below, in the past few months technology has risen passed financials to be the largest sector in the MSCI emerging markets index. The share technology has reached is much higher than in the early 2000s. The reason is twofold. First the internet wasn’t booming as much in emerging markets in the 1990s as it was in Silicon Valley. Secondly, commodity prices have been weak in the past few quarters. Just by being up slightly, tech would take share.

The chart below shows how emerging market inflation is stabilizing or decelerating across the board besides in China. Technology stocks do the best in a low inflation environment. An increase in inflation would put a lid on how high the tech sector can grow to as a percentage of the MSCI emerging market index.

Conclusion

I think it’s fair to say that next week is the most important week of the year for the stock market because the ECB will be deciding on QE, President Trump will be deciding on his Fed pick, and many big companies like General Motors, Haliburton, and Amazon will be reporting earnings. Keep in mind, that this doesn’t mean I’m expecting volatility. If everything goes as expected, then the market will rally. I’m just saying that it’s important to recognize that if these events all go wrong, it could tank the market in the biggest sell off of the year.

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1 Comment

  • Kirby Turpen

    October 22, 2017

    The ECB and earnings are going down this next week but not sure on the Fed pick, from the news articles that I read said that Pres Trump will announce before his Asian Trip, His trip is scheduled for 11/3-11/14. You are probably correct but wanted to clarify since whoever he picks will put a interesting spin on the markets. Thanks