The following commentary is an excerpt from the Weekly Roundup to Trifecta Stocks subscribers originally sent on Nov. 18. Click here to learn more about this dynamic portfolio and market information service.
The Trump Trade continued this week, leading to additional gains in all of the major market indices. Even after Friday's modest fade, the last eight days have led to a pronounced move in the market, especially in the Dow Jones Industrial Average and the Russell 2000, which are now firmly in overbought territory. While not overbought, the S&P 500 is within striking distance of its 52-week high heading into the weekend, which means the index is trading at nearly 18.5x expected 2016 earnings.
During the week the October retail sales report confirmed our thesis on the accelerated shift to digital shopping as well as consumer wallet share gains under way at Costco Wholesale (COST) . Meanwhile, the October reports for the Producer Price Index, industrial production and capacity utilization all showed there is room to run when it comes to the economy and the Federal Reserve's interest rate-hike triggers. Those reports were followed by Fed Chair Janet Yellen's testimony before Congress, which, in our view, was once again as clear as mud with helpings of "if," "maybe," "perhaps" and "data."
Add in the slowing of the German economy as well as the European Central Bank's comments that lay the groundwork for additional stimulus, and odds are the recent strength in the U.S. dollar will persist and weigh on export demand. In other words, currency headwinds are likely to remain without a December interest-rate hike. Then there is the uncertainty surrounding President-elect Trump's economic policies as well as the Dec. 4 Italian referendum, which has the potential to result in Italy leaving the European Union. As we see it, all of this increases the likelihood the Fed hits the pause button on a hike until the March 2017 meeting. We'll have more on this ahead of the next FOMC meeting Dec. 14-15.
While the next catalyst for the market will likely be results from Black Friday-Cyber Monday holiday shopping, those December signposts and the presidential transition mean the last month of the year could make or break stock market returns for 2016.
Turning to the Trifecta portfolio, we had several strong performers this week, including Amazon (AMZN) and Alphabet (GOOGL) -- more on both in a second -- as well as AT&T (T) and PetMed Express (PETS) . The continued Trump Trade that has pushed the major market indices higher and both the Dow and the Russell 2000 into overbought territory has weighed on our inverse ETF positions. But given the market's rocket-ship-like ride since the election, it is likely to give back some of those gains back in the coming days. While shares of United Parcel Service (UPS) were little changed, be sure to check out our technical analysis that ran earlier in the week if you missed it.
We used the recent weakness in Amazon and Alphabet to scale deeper into those positions as we no slowdown in the tailwinds that are pushing those businesses. Following Friday's earnings report from Foot Locker (FL:NYSE), we've downgraded FL's rating to Three from Two, which means we'll be looking to opportunistically trim back or exit the position in the coming days. We also saw a several changes when it came to the Street Quant Ratings, including:
-- AT&T shares downgraded to a B from A rating;
-- PETS shares were bumped to an A from B+;
-- UPS shares were moved to a B+ from A rating; and
-- Shares of International Flavors & Fragrances (IFF) were lowered to an A- rating from an A.
Now let's turn our gaze to next week, a short one due to the Thanksgiving holiday, which is one of our favorites... and it's not because of all the pie. Historically, the Wednesday before Thanksgiving is a big travel day, and forecasts call for more than 41 million people to be on the go this year for the holiday. This likely means that Wednesday will be a rather quiet day in the markets, as will Friday, better known as Black Friday.
This means the busiest days of the week will be Monday and Tuesday, with Tuesday seeing a hefty dose of economic data, including the weekly MBA Mortgage Index and jobs reports as well as the October reports for durable orders and new home sales. Also on Tuesday we'll get the next iteration of the FOMC minutes, this time for the Nov. 2 meeting. With the next FOMC meeting just a few weeks off and the markets once again split on what the central bank will do as it pertains to interest rates, those minutes will likely be dissected, parsed and scrutinized.
We expect to do the same and will be sharing our findings with you a little earlier than usual next week with a holiday-shortened version of the Weekly Roundup coming to you next Wednesday. Our thinking is that you, too, will be busy enjoying the holiday weekend, and perhaps doing a bit of shopping in the process. After Thanksgiving, Black Friday and Cyber Monday, we'll get our first hard look at holiday retail spending and what it means for our Amazon, Alphabet, Costco and UPS positions.
We continue to have our eyes open for new positions, but the reduced trading volumes associated with the back half of next week are likely to keep our hands steady.