The gifts addressed to investors just keep coming as it appears Ms. Market is in the holiday spirit earlier than normal this year. Call it the Santa Claus rally, the year-end rally, the sigh-of-relief rally, or just about anything you’d like, but the bottom line is the major market indices are enjoying a nice ride higher here.
The first gift investors received in the last week was a “phase one” trade deal that, so far at least, hasn’t been blown up by a tweet or a headline announcing the President has changed his mind.
From my seat, the key to this “deal” isn’t the amount of agricultural products the Chinese are going to buy or the exact amount of tariff rollbacks. No, this deal is about the idea that we’ve seen the nadir of the damage the trade war has done to the global economy. It’s about removing the fear of things getting worse. It’s about less uncertainty in terms of the global economic outlook. And perhaps most importantly, it’s about CEO’s being able to look/plan ahead.
The second gift that looks to be creating a celebratory mood on Wall Street on this fine Monday morning hasn’t gotten a lot of fanfare. But for those of you keeping score at home, the economic data out of China this morning is something to take note of.
For example, China’s Value-added Industrial Output for November came in at +6.2% year-over-year, which was above the +4.7% rate seen last month as well as the consensus estimate for a reading of +5.0%. So, this is a pretty solid “beat.”
Next, China’s Retail Sales numbers also surprised to the upside, coming in at +8% in November versus October’s +7.2% and the median forecast of +7.6%. Not bad. Not bad at all.
Does this mean that the world’s second biggest economy has turned the corner? Hard to tell. But in my opinion, this data series supports the thesis that things might be looking up. Or at the very least, economic conditions are not as bad as had been feared. As such, some celebratory buying looks to be taking place at stock exchanges around the globe.
So, I’m of the mind that what we are seeing right now looks to be the “discounting” of better days ahead for the global economy. As in, no widespread recession. As in slower, but steady growth in the U.S. And as in better earnings than those currently priced into stocks.
Some call it the latest iteration of the “reflation trade.” And if this is the case, we should expect to see the cyclicals and the much-maligned small caps perk up in the coming days and weeks. IF (note the use of capital letters) this occurs, the market’s advance would broaden out and put a knife in the back of one of the bear camp’s key talking points.
So, prices are movin’ on up. That’s a good thing at any time of the year. But especially as we distance ourselves from the pain of the holiday season on Wall Street a year ago. The question, of course, is how far can the bulls go? How high is high enough given the reflation trade theme? And how high is too high?
From my perch, the key will be to listen to the upcoming earnings calls very closely. From them, we need to discern if CEO confidence is actually improving and if companies will start to talk about visibility going forward. We need to see the economic data start moving in the right direction. And we will need to see all of the above translate into stronger earnings.
But for now, we can appreciate the gifts we are receiving during the holiday season. Thanks Santa!
Weekly Market Model Review
Each week we do a disciplined, deep dive into our key market indicators and models. The overall goal of this exercise is to (a) remove emotion from the investment process, (b) stay “in tune” with the primary market cycles, and (c) remain cognizant of the risk/reward environment.
The Major Market Models
We start with six of our favorite long-term market models. These models are designed to help determine the “state” of the overall market. Put another way, these models indicate which team is in control of the primary trend.
The are no obvious changes to report on the Primary Cycle board this week. However, it is encouraging to see the reading of the Global Risk Model improve a bit. While I have to apologize for sounding like a broken record here, the message from the Primary Cycle board is to stay seated on the bull train and use pullbacks as buying opportunities.
The State of the Fundamental Backdrop
Next, we review the market’s fundamental factors in the areas of interest rates, the economy, inflation, and valuations.
The Fundamental Factors board also saw no obvious changes again this week. But, I am pleased to report that there was some improvement found in the Economic Composite. The uptick is nothing to get overly excited about, but it does square with the theme that things may be starting to improve on the economic front. At least that’s my glass-half-full assessment at this stage of the game.
The State of the Trend
Next, we review the state of the current trend. This board of indicators is designed to tell us about the overall health of the current market trends.
Anyone who has followed this report for any length of time knows that it is actually rare for any of the boards sport all positive signals/readings at the same time. But this week, we have to give the trend board a perfect 10 as all the models/indicators are on “buy” signals and all the ratings are positive. And while there can be little argument that the current rate of change is unsustainable, it is always nice to see stocks movin’ on up at this time of year. We can worry about next year, next year; but for now, it appears that Mr. Claus is in the house.
The State of Internal Momentum
Next, we analyze the “oomph” behind the current trend via our group of market momentum indicators/models.
The Momentum board remains in good shape. And while I could always complain about the lack of oomph seen in our “thrust” indicators, I also know that the “thrust” signals were given in early October. As such, these oscillator indicators have basically “timed out” and will likely remain in the ho-hum zone until a new surge occurs.
Early Warning Signals
Once we have identified the current environment, the state of the trend, and the degree of momentum behind the move, we review the potential for a counter-trend move to begin. This batch of indicators is designed to suggest when the table is set for the trend to “go the other way.”
Last week, I opined that stocks were likely to remain range-bound until we got clarity on the 12/15 tariff deadline. And with clarity on the subject now achieved, it wasn’t surprising to see the S&P break to new highs. However, the bears contend that the breakout has been underwhelming at best and that the market remains overbought. And while our Early Warning board isn’t in a table-pounding position to support a counter-trend move, it is moving in the bears’ direction.
Thought For The Day:
Who looks outside, dreams; who looks inside, awakes. -Carl Jung
All the best, David D. Moenning Investment Strategist
At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None
Note that positions may change at any time.
NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Redwood Wealth and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as investment recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
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