| TAOST Wrap Week Ended Friday 31 January 2020 |
| Just think... "Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart."
-- Alan Greenspan
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| | Greetings Traders:
The broad market suffered a brutal sell-off on coronavirus fears, but Amazon swiftly rejoined the trillion-dollar (market cap) club after bangup quarterly earnings.
The only four companies with more than $1 trillion market capitalization — Apple, Amazon, Microsoft and Google-parent Alphabet — have actually traveled similar paths on their journey to the pinnacle...
These tech giants all looked to services and cloud businesses for growth in the past couple of years. In turn, the market has rewarded the companies richly, as each of their market values have climbed to record levels.
Friday’s sell-off also spoiled an old market indicator “January barometer” that was signaling a positive year. The indicator suggests a correlation between January’s performance and full-year returns, AKA the saying “as goes January, so goes the year.”
The losses cut the January returns for the S&P 500 to just about flat.
The biggest risk to the market right now seems to be the worsening coronavirus, which forced major U.S. airlines to halt service to China altogether.
“Uncertainty is never great for stocks, but when it involves the lives of many, many people, it’s impossible to know just what kind of problems this uncertainty will eventually create,” said Matt Maley, chief market strategist at Miller Tabak.
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| Select Index, ETF & Stock Results From Friday 31 January |
| | | In Sum
Falling. That kind of a day to end that kind of a week. Markets dropped sharply, with the Dow Jones Industrial Average shedding 603 points, or 2.1%, the S&P 500 down 1.8%, and the Nasdaq Composite off 1.6%.
The coronavirus has now sickened more than 9,500 people, killed more than 200, led Chinese authorities to quarantine a number of cities, prompted airlines to cancel flights, and caused the U.S. Health and Human Services Secretary to declare a public health emergency.
Friday's selloff left the Dow down 2.6% for the week. The downdraft felt all the more sudden because of the relative calm that had preceded it. Falling trade tensions, the U.S. Federal Reserve's clear commitment to holding rates steady, and solid, if not spectacular, economic data, all helped U.S. stock markets to settle into a pattern of relative calm, with 70 consecutive trading days without a move up or down in the S&P 500 of more than 1%. That streak ended Monday.
Another measure of how quickly things have escalated: the CBOE's Volatility Index, aka the VIX, aka the "fear gauge" is up 36.7% this month. While a large amount of that jump was due to Friday's behavior (see below) that's the single-biggest jump to start a year on record, as measured from the end of December to the end of January. The previous record was a 34.2% rise in the VIX set back in January 2014.
If all that has your blood pressure up, here's a bit of mildly reassuring news: In the year after the S&P 500 broke a streak of 70 or more days without a move of 1% or more, the index rose 9 out of 12 times on a total return basis, with an average total return of 9.6%.
S&P 500 -2.1%, Nasdaq -1.8% DJIA -2.6%
As China’s coronavirus continues to spread, concerns around the potential economic impact are growing as investors worry that the effect on global industrial supply chains could linger for years. China now makes up more than twice the share of global merchandise exports it did in 2003, when SARS virus hit. And global supply chains are considerably more complex than they were in 2003. Even manufactured items with a very marginal quantity of Chinese content will be affected as production is halted, and the increasing complexity of products means replacing specialized manufacturers is difficult.
In economic reports, the eurozone’s economy slowed sharply in 2019 as factories faltered and its automobile industry struggled (GDP rose just 0.4% in the three months through December and 1.2% for the year). The bloc’s economic weakness also reflects longer-term problems, including an aging and stagnant population, a weak presence in faster-growing digital sectors and problems coordinating responses to challenges across its 19 member countries.
Both the Bank of England and the Federal Reserve left benchmark rates unchanged this week. In England’s case, the expectation was for a rate cut but the BOE stayed steady as they argued that a slowdown in U.K. economic growth is offset by the potential for a post-Brexit bounce. And in the U.S., the policy decision was as expected as the Fed reaffirmed its wait-and-see posture.
Finally, on the earnings front, it was a big week for tech giants. We saw Facebook earnings rise, but expenses ate into margins and investors got worried taking the stock lower, Tesla posted upbeat results forcing the short-sellers to scramble once again. Microsoft and Apple recorded blow-out numbers and Amazon rejoined the trillion dollar club. But none of that mattered given the risks in the global backdrop.
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| | | While price action felt a bit hysterical last week (especially on Friday), the down side move was pretty benign when viewed within the context of the overall up trend. The S&P500 dropped right to support near the $320 level. That's a pretty obvious level to watch as we roll into the new week. |
| | CNN Investor Sentiment [Fear & Greed Index] |
| | Investor sentiment as defined by this tool dipped into Fear for the first time in awhile. That doesn't make the market an automatic snap back buy any more than a move into the Greed zone makes it an automatic buy. That said, keep an eye on this indicator for a move into the extreme area. |
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| | Like clockwork, the market delivered a pullback from the Extreme Greed Zone. I was asked this weekend why this is... The best way I can explain it is that markets hate extremes... No matter the time frame under consideration, price will not hang out in an extreme zone for an extended period of time (on a relative basis). |
| | | - The official number of cases of the Wuhan virus has already surpassed the total number of SARS cases. WHO has declared a global emergency, airlines and many countries are cutting travel links to China, 45's administration just declared a public health emergency, is suspending entry of foreign nationals who have been in China within the last 14 days and will require any U.S. citizens returning from the center of the outbreak in China to be quarantined for two weeks.
- The so-called Lazarus group has used elaborate phishing schemes and cutting-edge money-laundering tools to steal money for Kim Jong-un’s regime. Cyberattacks on cryptocurrency exchanges are common, but the theft of just over $7 million from DragonEx last month stands out. Why? Not just the sophisticated methods, but the fact the attackers appear to have been working for Kim Jong-un. Digital bank robbing looks to be part of a larger survival strategy by Kim’s regime, which has been cut off from the global financial system by sanctions. In all, the program has generated an estimated $2 billion for North Korea’s missile program.
- Housing markets around the world are losing steam. Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September—the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.
- Federal debt held by the public is projected to balloon to 98% of the U.S. gross domestic product in 2030, its highest percentage since 1946, vs. 81% in 2020, according to a report by the Congressional Budget Office. By 2050, debt would be 180% of GDP, far higher than it's ever been. It stems from the combination of tax cuts and projected increases in spending - particularly on safety net programs such as Medicare and Social Security.
- As part of their contingency planning for the next recession, Federal Reserve officials are looking at a stimulus scheme the U.S. last used during and after World War II. From 1942 until 1951, the Fed capped yields on Treasury securities—first on short-term bills and later on longer-term bonds—to help finance war spending and the recovery. At issue is how the central bank should manage a faltering economy when short-term interest rates are already low. In the past three downturns, the Fed cut its benchmark rate by around 5 percentage points. The rate today is in a range between 1.5% and 1.75%, leaving less room to counteract a downturn. Wow...
- A European Commission proposal seen by Reuters reveals an upcoming plan to create a "single EU market for data" aimed at challenging the dominance of Facebook, Google and Amazon. "Currently a small number of big tech firms hold a large part of the world’s data. This is a major weakness for data-driven businesses to emerge, grow and innovate today, including in Europe, but huge opportunities lie ahead," according to the paper. New rules to achieve the goal would cover cross-border data use, data interoperability and standards related to manufacturing, climate change, healthcare, financial services and energy.
- A salient fact from Colin Mayer’s book 'Prosperity': “Forty years ago, 80 per cent of the market value of US corporations was attributable to tangible assets—plant, machinery, and buildings—as against intangibles—licenses, patents, and research and development. Today, intangibles account for 85 per cent of the market value of US corporations. This is indeed a fact... but the truth is "value" has always been (and always will be) about perception... even of tangible assets.
- The new frontier in medicine: TikTok. Doctors have long taken to social media to share healthy messages or promote their work, but now the short-form video app is being used to counter medical misinformation to a surging audience.
- U.S. life expectancy increased in 2018 for the first time in four years. Lower mortality from cancer, accidents and unintentional injuries were the main reasons, according to a report from the Centers for Disease Control and Prevention. Drug overdose deaths among U.S. residents fell 4%, the first such decline in 28 years. Among the top 10 causes of death in the U.S., only two increased in 2018: suicide and influenza/pneumonia.
- Smartphone shipments for 2019 were down 2.2% on the year before, according to preliminary figures from analyst house IHS Markit. On the plus side, the decline was a little better than the 2.4% drop experienced between 2017 and 2018. Samsung is still the market leader, and Huawei is still in second place—at least, based on the year as a whole.
- 45 signed legislation to implement the U.S.-Mexico-Canada Agreement, or USMCA, on Wednesday, fulfilling a key campaign promise to renegotiate North America’s economic infrastructure. At its core, USMCA is a modestly amended, rebranded version of the North American Free Trade Agreement, which took effect in 1994, along with some newer provisions that the Obama administration had negotiated in a Pacific trade pact that 45 exited.
- Alibaba co-founder Jack Ma is donating 100 million yuan ($14.5 million) through his charitable foundation to fight the coronavirus outbreak, joining Bill and Melinda Gates in pledging assistance. That’s on top of an offer by his Alibaba Group Holding to establish a 1 billion yuan fund and share its artificial intelligence expertise with researchers.
- The chairman of Harvard University’s chemistry department was arrested on charges of lying about receiving millions in Chinese funding.
- In a recent report from Gartner, the technology research firm, is forecasting that 69% of the tasks managers currently perform will be automated within the next four years, “requiring a complete overhaul of the role of the manager.” The same report also predicted big trouble ahead for companies’ attempts to retool and reskill their workforces to face this newly-automated future. It forecast that 47% of learning and development budgets will wind up wasted as A.I. eliminates about two-thirds of what Gartner calls “on-the-job, task-based learning opportunities.” This is a big deal folks... pay attention.
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| TNX - 10 Year Note Interest Rate |
| The 10 Year Yield fell again on a "Flight To Safety Trade."
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| | GLD - Gold Trust Gold Shares |
| Gold held it's breakout and looks geared to push higher... especially if global uncertainty continues to rise unabated.
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| | | Bitcoin confirmed the breakout and looks likely to move higher in short order. As an aside, the move is being attributed (at least in part) to the rising health crisis in Asia. I find that unlikely... While it could be a rotation out of equities play (due to Coronavirus contagion and impact fears), its hard to construct a narrative where Bitcoin is a direct beneficiary of the spread of the virus. Now facemasks on the other hand...
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| | JNK - High Yield [Junk] Bond ETF |
| A clear turn lower in front of resistance, but that doesn't mean the up move is over.
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| | BRN - Brent Crude Oil Futures |
| Crude remains structured to the downside on the weekly chart, and price action is bearing that out.
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| | VIX - S&P 500 Volatility Index |
| | Friday's action in the US stock market produced a 20% spike in the VIX... but I don't see this as a leading indicator... like most, it's a lagging indicator, telling us what the market did vs. what it's going to do. |
| | | Below you'll find stock news and the associated charts. |
| | Southwest Airlines Accusations: A government report set to be released in coming days says that over two years, the airline’s pilots flew more than 17 million passengers on planes with unconfirmed maintenance records.
The weekly chart pattern still looks positive... but if this news is not in the stock, look out below... |
| | | Apple (below) and Broadcom have to fork over $1.1 billion in damages for infringing California Institute of Technology patents on Wi-Fi technology, a jury in California decided this week.
Broadcom looks strong... but I think the company should lean on its Trillion dollar co-defendant to pay these damages... |
| | United Parcel Service [UPS] |
| Waymo is partnering with UPS to pilot autonomous vehicle package pickup. As a result of the partnership, Waymo vehicles will begin delivering parcels for UPS in autonomous Chrysler Pacifica minivans in the Phoenix area. The minivans will transport packages from UPS store locations to UPS’s sorting facility for processing. The vehicles will not deliver packages directly to customers.
This is a nasty break in UPS... presumably because a slowing of the global supply chain will hurt transportation companies immensely. |
| | | Tim Hortons has removed Beyond Meat products from its shops in Ontario and British Columbia, after eliminating the meatless items from all of Canada in September except the two provinces. "The product was not embraced by our guests as we thought it would be," said a spokeswoman for Tim Hortons. While plant-based fast food has been gaining in popularity, some are questioning its environmental and health benefits.
Convincing the brain that not meat is meat was always a speculative (pun intended) undertaking... |
| | | Reworking its deal terms, Altria is taking another $4B charge on its investment in Juul Labs, which faces heightened scrutiny amid a backlash against vaping.
The stock has been making lower lows and lower highs on the weekly chart since 2017... May as well take all the hits while they're at it. |
| | | | Uber is under siege in Latin America. It is part of a bruising price war where its ostensible rivals are Rappi and China’s Didi Chuxing Technology. But here’s the twist: All the combatants have as their biggest owner the same tech investor, SoftBank Group. The Japanese conglomerate has injected a total of $20 billion into the three companies.
Also UBER...
Nissan has struck a deal with Uber to provide electric vehicles to drivers in the U.K. As a part of the deal, Uber will offer 2,000 Nissan Leaf electric vehicles to drivers in the region, with the agreement focused on drivers in London.
UBER hit resistance at $37.50 and looks to be reversing for now. |
| | | | | | | Still structured higher notwithstanding Friday's big move down. Bulls should only get worried if the stock breaks the rising trend support line convincingly. |
| | | I said I expected Amazon to break out of this triangle pattern to the upside.... I still do, especially in light of this start after earnings... and on a massive down day I might add.
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| | | | We remain above breathable air in the stock. Real support is all the way back between $220 and $240. $265 is modestly interesting in light of the stock's behavior during its brief time in that area, however I wouldn't lean into it too heavily there... and anyway even that level is a "country mile" away. |
| | | | Netflix still looks good to the upside... I just don't know where the catalyst will come from as this period's earnings are in the books. |
| | | Alphabet reports on Monday after the close... It's hard to see how the stock avoids disappointing based on what are clearly pretty inflated expectations. If I owned it, I wouldn't sell it... but I would trade around it by selling short dated, covered calls for the premium.
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| | | Select Economic Announcements: |
| | | As always, make up your own mind and, more important, minimize your risk no matter what you do.
KIS,
The Trader
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