What makes for a voracious rally? What can trigger one when it is least expected the week before? To me it's a complicated cake to bake but in light of today's stunning results let me give you the recipe.
First, last week we left thinking that China was going to put on some tariffs that would severely weaken the stock market. Yes, the stock market. Maybe even cause it to break through the 200 day moving average. You laugh, but let me tell you from when I saw the Communist Party manipulate its own stock market it learned an awful lot about the technical.
I know a lot of people thought that when China announced $3 billion in largely agricultural tariffs that it showed it as afraid of us and was cowering at the possibility that we could put $60 billion in tariffs on them, double what we heard a week ago. It was almost as if the number was picked out of thin air. There was initially a lot of relief about how China was so compliant and such a paper tiger.
But this weekend they let official press organs know that they are ready to put the hammer to Apple (AAPL) , Intel (INTC) and Boeing (BA) . Tim Cook, Apple's CEO, was over in China talking about the benefits of free trade. Still any cutback in Chinese sales would be devastating for the numbers, which is what stocks trade on. Intel? That's a double-edged sword. Intel's in a soup-to-nuts chain of the p.c. to the data center to the autonomous driving vehicle. What a hit its stock would take. Boeing's a little more complicated. The stock would get pummeled for certain because a lot of the middle-classification of the globe rests on Chinese tourism. But Boeing has such demand that there would very easily be other companies taking the Chinese spots in the queue.
In other words, you are talking about far more than just wine, pigs and assorted fruits. You are talking about huge trading partners with very big cap stocks. If you are a President that wants higher stock prices you have to be willing to say "you know what, bring it on!" which is the market's real fear as the President has let it be known that deregulation and tax reform should make CEOs happy and now they are just greedy.
No matter. They put good cop, Treasury Secretary Steve Mnuchin, on Fox, this weekend and he talked about progress in trade talks, that perhaps the Chinese would lower tariffs on U.S. important given that General Motors (GM) sold more vehicles in China last year -- 4 million -- than it did in the United States and maybe more respect for intellectual property.
If could be a fig leaf. It could be the real deal. No matter it, at least, showed the other side of the trade, that President Trump may be able to pull something off that causes him to be able to claim a win. Plus, the U.S. got a very good deal with South Korea that has caused prices for our steel to go higher, a total win for an industry the President supports and an industry that has been treated very unfairly by previous administrations.
So vital to the recipe? An extremely negative story on Friday becomes a hopeful story on Monday, especially if we dodge the Apple, Intel, Boeing bullet the three big manufacturers that could disrupt the averages.
Next part of the recipe? Stormy Daniels. All week the bears have been lording a big negative over the market that 60 Minutes has a tape of the President with Stormy Daniels that would directly contradict the sworn affidavits that Stormy Daniels signed saying she only met the President in ways other than the bedroom. Three times this woman agreed that she wasn't with the President that way. So a tape would be devastating.
But when the story ran, there was no tape, just a person who tried to disagree with her own denials. I felt by the end, after repeated questioning by Anderson Cooper about the signed denials that maybe Cooper was barking up the right tree -- even as he might have not expected that to be the takeaway. The convoluted trail of payments was totally confusing even as Trevor Potter, a good witness and former Chairman of the Federal Election Commission, said that there was something not kosher that was done by one of Trump's lawyers. I'm not saying it was much ado about nothing. The whole thing had a high embarrassment factor. But the bears needed a tape and 60 Minutes never claimed to and didn't have one. It did keep us watching the Duke-Kansas game which had a very surprising, but not impactful to the market finish.
Next part of the recipe? The yeast that let this market erupt: the oversold position of the stock market. Back in February when things were falling apart and the VIX and all of its fellow travelers ignominiously blew up on a long stock short VIX call, we attributed the losses, initially to interest rates. It was only later that we recognized that there were nefarious forces at work -- namely margin clerks selling out the stock positions of people with billions of dollars in borrowed money. That's why there was such severity.
We got to minus 10 on the proprietary oscillator that I pay a lot of money to S&P to get. You buy at minus 10 unless there is huge systemic risk like a collapse of the banking system at the end of 2008 and beginning of 2009.
This time we got a reading of minus 6 and I have to tell you that while that's not a minus 10 anything below 5 usually means you have to cover your shorts and I think a lot of this rally is about traders covering their shorts.
But before I dismiss that remember that almost all rallies start with short covering. This one could be no different.
Final portion of the recipe? The worst acting stocks have to stabilize. I think that the worst acting stock I have seen in ages is Facebook (FB) . Yet for all the sturm and drang of whatever the heck they did or didn't do, the stock fell to levels that Wells Fargo (WFC) and Target (TGT) fell on their cross-selling and credit card breaches. Target eventually came back but there were plenty of alternatives to go to. Wells hasn't recovered.
Facebook? It is now factoring in almost no growth. I say that because it sells below a market multiple on next year's earnings and almost all of the companies that sell at below the average multiple and some that sell above it have little to no growth. Last year this company had more than 40% growth. Sure there will be people who defriend it or stop it or whatever. But advertisers still love it by every survey I see. Washington has its fangs into Facebook -- couldn't resist, and the stock took a big dive when something that was reported already, and FTC investigation, broke again! That's usually a sign of an oversold market. I loved the apologies, good first step .But now they have to pick an outside counsel/investigator, someone the feds trust to see whether its policies are working and determine what went wrong. Doing that would send the stock up a quick 10. The only reason why they wouldn't do this? They have something to hide. Wouldn't hurt if some outside directors made some statements either while I am at fixing up their mess.
So that there's how a rally cake gets made. My advice? Go over your portfolio. If it didn't go up today, you've got a real problem on your hands. If it did, let it run a bit but don't get greedy because it is very important that whatever comes out of China does not include Apple, Intel and Boeing on a tariff hit list and stays at fruits vegetable swing and vino.