Stocks Exit Extremely Oversold Territory

Stocks Exit - Biggest Post Election Rally Since 1982

The stock market rallied sharply after the midterm elections. Dems won the House and the GOP held the Senate. S&P 500 usually rallies 0.7% after the midterms. Instead it rallied 2.12%.

This is the biggest increase since 1982 when it increased 3.9%. It’s good to get past an uncertain event without anything negative happening.

Usually a divided government is better for stocks than one completely controlled by the GOP. However, I think the main stocks rallied was because they were oversold.

Finally, after this strong rally, the CNN Fear and Greed index has exited the extreme fear category.

Now it is at 29 out of 100 which indicates fear. I’m no longer extremely bullish on stocks in the short term. The S&P 500 is only down 3.37% from its record high in September. And it’s up 5.25% year to date.

Personally, I think a trade deal with China needs to be made before stocks can reach a record high. Therefore, I don’t see much more upside.

If you believe there will be a trade deal soon, you should still be extremely long.

Stocks Exit - Amazon Soars & Zillow Craters

Nasdaq increased 2.64% and Russell 2000 was up 1.67%. VIX fell 17.83% to 16.36.

Zillow stock ended up doing way worse than the 18% decline after hours as it fell 26.92%.

Investors hate the idea that it’s going to start flipping houses when home flipping fell 18% year over year in August. Normally, this would be a risky business venture.

It’s even worse because this is a terrible time to start flipping houses. The CEO stated he’s betting the entire company on this venture. He should reconsider that after this massive crash. The stock is at its lowest point since June 2016 and it’s down 54% from its peak on June 15th.

Every single sector was up. Best sectors were consumer discretionary, technology, and health care. They increased 3.12%, 2.88%, and 2.94%. Amazon drove up the consumer discretionary sector as it increased 6.86%.

In the past 10 trading days, Amazon has had 6 one day moves of 4%. Amazon and Netflix will be a great stocks to short once the business cycle ends. But we’re not close to that yet. Y

ou need to be 100% sure the cycle is turning before you make such a risky decision. Worst sector was consumer staples which increased 0.56%.

During the October swoon, consumer staples hit a 9 month high, outperforming the S&P 500. This was unlike the January to February correction.

Stocks Exit - Last Treasury Action Before The Fed Meeting

The 10 year yield is at 3.23% and the 2 year yield is at 2.95%. That's one basis point away from the cycle high. And, that’s a 28 basis point difference between the two yields.

There is only a 78.8% chance of a rate hike by the end of the year. If one occurs, the 2 year yield should jump above 3%. The hike isn’t fully priced in.

Curve inversion has been delayed like it has been several times in this expansion. I still think it will still occur in the next 8 months.

As you can see from the chart below, the gap between the ECB repo rate and the Fed funds upper bound is about to be the highest since at least 2000.

Both the European and American economies are seeing growth slow. It’s good that the Fed has normalized policy. But the rate hikes in 2019 will slow growth even further.

Stocks Exit - Weak MBA Mortgage Applications

The MBA mortgage applications for the week of November 2nd were once again weak.

After the composite index declined 2.5% week over week in the previous week, it fell 4%. Purchase index fell 5% on top of a 2% decline last week. Refinance index fell 3% on top of a 4% decline. Unadjusted purchase index is 0.2% below the first week in November of last year. It it’s at the lowest level since November 2016.

It’s definitely a buyer’s market.

Refinancing share of the mortgage market fell to 39.1%. 30 year fixed mortgage rate for loans $453,100 or less increased 4 basis points to 5.15%. That’s the highest rate since April 2010.

The situation is quickly getting worse. That's disconcerting considering the strong labor market.

If houses can’t be sold in this environment, it’s going to be even worse if growth slows in 2019. Housing market weakness can also add to the slowdown.

As you can see from the chart above, the inventory of unsold homes has reached 7 months. That's the highest point since 2011. At that time, the housing market was recovering from the previous bubble.

Interestingly, Seattle real estate sales are down 17.5% year over year in October. While inventory was up 102% to 2.4 months.

Clearly, the 102% increase doesn’t pack as much of a punch as you’d think. Inventory of 2.4 months is still way below the national average. I expect it to keep increasing as the Seattle housing market continues to cool off.

As you can see from the chart below, housing inventory of 7 months is historically correlated with 0% GDP growth.

The latest update from the Atlanta Fed GDP Nowcast shows Q4 growth will be 2.9%. It’s still early in the quarter, but I highly doubt GDP growth will be 0% in Q4.

That being said, I expect housing inventory to increase, which will only reinforce this negative prediction for GDP growth.

Stocks Exit - Conclusion

Stocks have finally recovered from this correction. Enough for me to say they are no longer extremely oversold. Personally, I am not extremely bullish in the short term.

Stocks can rally a couple percent more by the end of the year, but 2019 looks dicey.

The date where the tariff rate with China increases to 25% is quickly approaching. I wouldn’t buy stocks for the intermediate term. There is limited upside and many potential catalysts for a bear market.

If you think a trade deal will be made by the end of the year, you should be buying stocks.

 

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