Whenever things have happened that weren't supposed to happen, there are big repercussions to the market. Currently, the market's being gripped by a series of positives occurring right now that are forcing big institutional investors off the sidelines.
In other words, people didn't see them coming.
First, I don't know many who look back at the last week of August and think that we saw some sort of surge in economic activity in this country.
But if you go back to that week, you will see something uncanny among all of the charts of the industrials and old techs: a bottom. That's right, those stocks, which had been pretty much in free fall for most of the summer, started their pivot right then.
I have been over and over that period, trying to figure out what changed in the economy. The answer? Not much at all.
The world? If anything, we caught another leg of deceleration. The dollar? Nope, it got stronger right after that period. That's a factor alright -- a negative factor. Earnings? What few we had back then verified nothing. With the exception of Best Buy (BBY) and Trifecta Stocks portfolio holding ULTA Salon (ULTA), they were almost uniformly bad, and even Best Buy has failed to rally since then.
No, there was only one noticeable market input that week, and when it happened it was universally pooh-poohed as phony: the Chinese stock market bottomed.
Try as we may to relate the Chinese stock market index to anything, given its phoniness and its emphasis on so many companies that are domestic, that Aug. 26 bottom at 2927 has held and held through a torrent of bad Chinese economic news. Since then, there are have been four forays of some consequences from the bounce after Aug.26, and that 3000 level, above 2927, has held.
I remember when the level was first under attack by sellers and it seemed like child's play to take it out. There had only been 23 days since the June 12 peak when the averages had gone up. Almost every single up day had been met with selling. Since that bottom, 50% of the days have been up, some meaningfully, and even though I don't know a soul willing to proclaim a bottom in that index, any time an index has hold a floor under four separate assaults in this country, there would be plenty of emboldened bulls willing to say a bottom is in.
Amazingly, any overlay of our industrials and techs over that index shows a correlation that's more than a little startling.
Now, there's a second, almost surreal data point that does resonate, which occurred two days before that Chinese bottom: oil stopped going down. The newfound "paper" of record, Business Insider, captured the moment: "Crude Oil Collapses to a Stunning New Low," at $38. Now keep in mind, this price didn't look like a bottom either. In fact, 15 days later Goldman Sachs called for $20 a barrel, causing shudders in the industry. But oil never came near that Aug. 24 bottom again.
Now, we don't know which had more of an impact on the industrials, China or oil. We do know that every single chart of the major oils bottomed there, although the master limited partnerships, more gripped by margin calls, may have thrown those looking at a bottom off the scent.
All we do know is the industrials and old techs have been straight up from there. By the way, there's been no similar correlation with either the high-growth tech stocks or the biotechs. This bottom has been limited to the oils and the industrials.
Now, the high-growth camp might want to say that these stocks bottom simultaneously, with the rotation out of biotech and fast-growing tech stocks, but it doesn't fit.
The Fed-centric people, whom I regard as the majority of commentators largely because it is so easy to blame the Fed for everything, might argue that we got a bottom from the comments from James "wrong way" Bullard, who infamously said he was "sanguine" about the U.S. stock market and economics worldwide, but that would require you to say that the bottom was put in before the stocks. I regard that as a little far-fetched -- as juicy as it is, of course.
Similarly, the technicians might want to claim that the Aug. 24 flash crash, in the wake of Bullard's irresponsible Friday afternoon comments about being "sanguine" on the all-important Sirius Satellite stage, fits the bill. The flash crash remains a sore point, but I still regard it as a serious breakdown in the system, not a "test of stocks." Call that coincidence.
To me, it is all oil and China. Which makes for a more compelling view of what's happening now.
The hitherto unremarkable trading in oil should be viewed for what it is: the moment when many of the large independents were able to avoid catastrophe. Ever since that bottom, it has been the weak hands that have fallen, not the stronger ones.
But China's the most compelling story, because it happened to occur the same weekend that Tim Cook says told the world in an email to yours truly that business is very strong in China. That was a precursor to similar calls from Nike (NKE) and Action Alerts PLUS charity portfolio holding Starbucks (SBUX). Yum! Brands (YUM) threw us off course last week, but the reopening of the Chinese stock market after Golden Week fits the bottom thesis.
So do the data released yesterday, showing a much stronger year-over-year spending level in China, which would suggest that the bottom in the Chinese stock market marked an acceleration in consumer spend for that country.
We have seen no similar bottom in actual manufacturing activity. The big, ugly metals haven't bottomed as of yet, in part because the miners haven't caught a bid, although we have had several of these overproducers blink, including the troubled Glencore, which is now selling assets and closed a zinc mine, coupled with Freeport-McMoRan (FCX) scaling back copper production. But the Baltic Freight Index has no such bottom in sight, and Alcoa's (AA) comments last week indicate that things are still weak in the manufacturing world.
Nevertheless, the industrial/oil bottom is unmistakable and it has been something that I have not heard heralded by anyone, because nobody believes the bottom in the Chinese stock market has been put in.
Step back though, and you can see it as plain as day.
Tomorrow begins the real American test, as we get earnings that could be Alcoa-like -- meaning, the move is artificial, at least for the industrials.
However, I think not. I think both bottoms are lasting. If that's the case, anyone who hasn't participated in the oil/industrial rotation could get run over. Anyone who has been buying into the anemic consumer packaged goods rally could be right.
In other words, here it comes: a possible peak in oil at $50, and earnings for the industrials themselves.
I will stick my neck out, though, and say both trends are for real. If so, it bodes very well for the rest of the year and will cause some radical rethinking in everything from companies like Dividend Stock Advisor portfolio holding General Electric (GE) and Schlumberger (SLB) that report this week to those companies truly linked to the Chinese consumer and that of any other emerging marketplace: think Intel (INTC), IBM (IBM) and Microsoft (MSFT).
Gentlemen, start your engines; may the best group -- the oils and the industrials, spotted points ahead of the race -- continue to win.