So quiet was trading the day before Christmas, which was a half day on Wall Street. There is no way to deny that both the broad as well as more narrow indices barely budged on volume that itself had declined on Monday from a "quad witching" of expiration events on Friday. Those kinds of forced spikes in activity tend to force an odd feeling into the narrative even when the holiday season is not a major part of the story.
They say that professional traders take these days or weeks off, and there is some truth, as well as some fallacy to that thought. Understand this. For those who work for someone else, and can not at this point impact an already capped performance based bonus, there is less motivation in a year such as this to get involved (been there, done that). Then there are others who may not quite have recovered from positions gone wrong, or a lack of participation earlier. Those individuals have been forced to chase a market that appears to be void of enough supply at any price point as of yet. Many traders have discussed the fact that target prices have been met at an incredible rate late in 2019, and thus just have the "good" problem of not having a menu of potential losses to be taken for tax purposes against their winners. My thought? Enjoy a year where "that" is the problem. That's certainly not, by any stretch... every year.
Then there are those of us who work only for ourselves. We are fewer, and usually smaller than our client serving counterparts, but then again, we are free-er. That said, we never really take completely off. Could be 3 am, midnight, on vacation, or in the gym, we know when markets move, and always make sure that we have a way to connect should the need arise. Our families sometimes hate that about us, but that is how we make our hay. We're like vultures.
Put Up Your Dukes
All that said, I would not expect business to light up the volume on Thursday, which is Boxing Day (a holiday) for many nations as well as many markets across our globe. Fear not. Everything that you thought dangerous in 2019 will still be there waiting to render you mental torture in 2020. The Federal Reserve will stand pat on short term rates for the year. They say. Yet, the liquidity crisis prevention program targeting T-Bills has set up an obvious increased potential for a "Taper Tantrum" as soon as March. Consumer level inflation seems tame, and will continue to appear so, until it does not. A significant change there, changes everything the Fed has projected. They're never wrong, right?
The (Un) Employment situation remains in a good place. Hence, so does consumer confidence. Going one step further... so does market sentiment. A strong labor market is almost never a negative going into a national election. Then again, these are not normal times, and this is likely to be no normal national election. Good thing the Phase One deal with China is already on the tape. You kids got that thing signed, right?
Tis The Season?
One of my pet peeves, and I guess in the grand scheme of things, it matters not... but this is a peeve, would be the number of those folks either participating in, or covering the financial markets that have referred publicly to month to date December performance so far as the "Santa Claus Rally." Anyone hanging around these markets for just a few years, knows darned well that the traditional "Santa Claus Rally" only includes the last five trading days of the year, and the first two trading days of the next year. That means it starts today. Happy Boxing Day. A Joyous Kwanzaa. That means it ends next weekend. The rally worked like a charm, even last year... even after many traders running net-long (most of us) had been run over throughout a fourth quarter 2018 back alley beat-down.
The question this year for you, and for I, is simple. Being that we have already experienced a market that has pushed the S&P 500 3.6% higher over a month's time, can we ask for more? According to the Wall Street Journal, since 1900 - so we are talking about more than a century - the Dow Jones Industrial Average has seen a rise during this period 76% of the time, and since their creations, the S&P 500 (76%) and the Nasdaq Composite (79%) have performed in line with that trend. These broader indices have average gains in between 1.6% and 1.9% over this seven day trading period over that time as well. So, you want to tack another 1.5% onto your net-long portfolio before they blow the whistle? You don't make 1.5% over a week and a half all that often. May the odds be ever in your favor.
You'll Need Some Fuel
To Build a fire. Ask any of us. Pick your favorite financial media pundit type. Almost everyone among us will tell you the same. Equity market performance eventually boils down to forward looking corporate earnings performance. Sure, we all rely on technical analysis for help in figuring out where the bus stops are, but only sound or lack of sound fundamentals tells us which way the bus is going.
Yet, here we are, on December 26th, 2019, with an S&P 500 that has roared 29% year to date on earnings growth that is expected to print in negative territory for a fourth quarter in a row once those numbers start coming in. Here we are, on December 26th, 2019, with an S&P 500 trading at 18 times forward (next 12 months) looking earnings, versus a five year average of 16.7 times, and a 10 year average of 14.9 times. I have told you all year long that historical averages were meaningless as the environments that created them were so very different. That much is true, as changes to fiscal policy to include corporate tax cuts have come about, as an anti-business regulatory environment has now evolved into a business friendly regulatory environment that itself blossomed into an incredibly robust demand for labor. This has worked wonders on where to place investment dollars as Americans now save more of their disposable income on a sustained basis (two year window) than for any comparable period since 1993.
Fork In The Road
I have told readers and viewers in the past that equities deserved what are historically elevated valuations in the present and would continue to demand such valuations until debt securities paid enough to draw into that quarter, investment otherwise earmarked for stocks. Makes sense, right?
There are two paths that take us there. The healthy one where economic growth leads. That's the one with the yellow brick road, fields of beautiful flowers on both sides, that leads to the incredibly attractive Emerald City in the distance. The less healthy path toward higher rates is the dark, unlit road, with dead trees on both sides, leading toward an uncertain future. This path is not led by growth, but by consumer level inflation that forces the central bank to aggressively increase short-term rates before you and I are ready for them.
How will the Fed act at the first sign of increased inflation? For the most part they indicate patience. Then again, they erred on the side of aggression in 2018, staunchly acting against broad professional advice that now quite obviously better understood the economy at that time than they did.
The result was an inverted yield curve and a closer than you think scrape with recession. In fact, we will not know for a while yet, whether or not that inverted curve that only un-inverted in early October after holding at negative spreads for five months, really did foretell of such an outcome. As for the voting composition of the FOMC, in 2020, Cleveland replaces Kansas City, and Minneapolis replaces St. Louis. Those two swaps largely amount to a wash. (hawk/hawk, dove/dove) The other two swaps might be wild cards. Out go Boston and Chicago, both dovish thinkers turned more hawkish, to be replaced by two of the newer regional presidents at Dallas and Philadelphia. These two don't quite have the lengthy track record we see among some of the others, though both have shown to this point some pragmatism in their approach. Pragmatism, I think far better than an agenda or a loyalty to an ideology.
Anyone Else Seeing This?
Apparently, according to that nation's Customs Administration, China imported 2.6 million tons of U.S. soybeans in November, up from 1.1 million tons in October, and up from zero in November 2018. Phase One trade concession? Sounds like it. Probably not. China has a lot of mouths to feed. We know that their national hog herd has dwindled due to illness, and we know that food prices in China are soaring.
This is market need, and perhaps nothing more. Though U.S. farmers suddenly appear to be the big winners after months of pain, China is rapidly increasing imports of soybeans from other Western Hemisphere "bread basket" nations as well. Indications are that these imports will have increased quite significantly from November into December as well.
This is of course welcome, but we'll know more once food prices in China hit resistance and once the hog population hits support. Until then, I think China is just doing what it needs to do in terms of demand, and the U.S. just happens to have had ample supply at the ready. Stay tuned.
Trading Thoughts
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Reuters reported on Tuesday that Boeing (BA) had apparently submitted new documents to a House of Representatives transportation infrastructure committee that show "very disturbing" comments made by Boeing employees over the 737-Max aircraft. Though the article that I saw posted late in the session, I think it was clear to see rather early in the session that something was wrong. I told you that I would sell the Boeing shares that I had picked up in Monday's pre-opening hours at either $343 or $333. That was a lie. I sold them early on in Tuesday's regular session as soon as I noticed intra-day MACD get ugly. Will I get upset should the shares rally into year's end? Not at all. This was just a trade, and a win is a win. We have no feelings.
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Most readers know that I re-entered Lululemon Athletica (LULU) on the long side on the December 12th post-earnings dip. These shares closed at $229.03 on Tuesday, and an exit right here would be another good trade. Take leave? Or get more involved. Those who follow along with the research provided at Goldman Sachs, or simply read Steve Sears at Barron's (probably the best read at Barron's) already know that LULU tends to move around going into and/or out of the ICR Conference. (A big deal in retail running in 2020 from Jan 13 through Jan 15 in Orlando.) In fact, apparently LULU moves an average of 7% up or down for the two days around that conference and a rough 14% up or down for the first three weeks of January, in each example over the past eight years.
A 14% move (at this price, I don't know here it closes on December 31st just yet) implies loosely a potential for prices ranging anywhere from $197 to $261 by the end of the third week of 2020. My thoughts, though it's early, are to add January 24th calls (maybe $230's, last $7.18), while selling enough January 24th puts at a discounted strike price (perhaps $210's, last $1.41) to sufficiently subsidize the expense. Right now the ratio would be about 5 to 1. If uncomfortable, a trader could take on more of the upfront expense, and subsidize less. Right now, it's just a thought.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 221K, Last 234K.
The Fed (All Times Eastern)
No public appearances scheduled for today.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant quarterly earnings results scheduled for release today.
