The Way They Went
By the time the second bell had rung, I was fairly sure. Monday's session was an odd one when taken at face value. That said, the action that there was, did make sense. First, equity markets opened on weakness in response to a Bloomberg News story that pointed toward a Chinese side that might not be that interested in making any broad-based deals this week. That weakness did not have much staying power, as White House economic adviser Larry Kudlow made comment that the U.S. might be open to the possibility of a short-term trade deal with China as long as there was a clear path toward dealing with the "structural issues" that the Trump administration has made a priority of going forward.
The optimism visible across U.S. equity markets was not to last either. Markets would once again soften late in the day, as the Fox Business Network reported that the Chinese Commerce Ministry expressed a willingness to make a deal where there is agreement between the U.S. and China, far less willingness to make changes elsewhere. Broader U.S. equity indices would close at the bottom of their daily ranges. The broader indices would surrender more than one third of one percent. The S&P 500 and the Nasdaq Composite would both surrender their respective 50 day SMA's. In fact, the Nasdaq Composite left that line looking eerily like resistance.
Both the Russell 2000 and the Dow Jones Transportation Average managed to outperform broader markets, closing down small. However, traders should be cognizant of the fact that these transports suffered the formation of what is known as a "death cross" as the session closed. A death cross is a term used by traders to describe a crossover to the downside of the 50 day SMA over the 200 day SMA (the opposite of a "golden cross"), and is considered by many to be a bearish indication. Take a look here...
Looking for a positive? Aren't we all. Well, here's one. Trading volume remained very thin for the day and for a third consecutive session. Professional participation has remained light since last Wednesday, meaning that while portfolio managers may have been aggressive during last Tuesday and Wednesday's selloffs, and then took a powder during the Thursday-Friday rally, at least in aggregate there was not a broad re-engagement as markets softened.
The Way They'll Go
A broad-based deal. Wouldn't that be nice? A narrower deal that allows both sides to claim some kind of victory without either having to concede anything in semi-permanence? The marketplace might take very kindly to such an idea. Very kindly.
What if the two sides walk away from the table, without agreeing on much at all? Recent increases in Chinese agricultural purchases wither. The U.S. increases tariffs on $250 billion worth of Chinese imports from 25% to 30% on October 15th, with a much more consumer-centric 15% levy on more than another $150 million worth of these imports ready to go on December 15th.
In the longer-term, the U.S. economy's growth would continue to slow, as would China's... as would planet Earth's. U.S. corporations would continue to adapt as they always have. I am not saying that this will not hurt. I am saying that like all of us on an individual level, we adapt. We overcome. The financial marketplace? That's another story, and may take a more circuitous route to get where it's going. It's no secret that markets have gone from a playing field where buyers and sellers meet in a centralized location, creating a thick book of bids and offers to a game of speed, controlled by keyword reading algorithms that move immediately on news, and then momentum bots exaggerate that movement. It's no secret that such activity spread across multiple locations have badly thinned out what remained of that "book of bids and offers" badly hampering both block trading and what might be considered a sentient form of price discovery.
That May Leave a Mark
It was not long after, the position attributed to the Chinese Commerce Ministry made headlines that the United States added 28 Chinese entities, including eight Chinese tech companies to an export blacklist (alongside telecom/5G giant Huawei), based on their perceived role in northwestern China in the repression of the Muslim minority there. The U.S. denied that this move had anything to do with the trade negotiations taking place in Washington this week. Included among the eight was Hangzhou Hikvision Digital Technology, a world leader in artificial intelligence and surveillance technology.
Incredibly, this all comes in the wake of support for the protesters in Hong Kong that Houston Rockets' general manager Daryl Morey had tweeted out, putting the National Basketball Association in a difficult position. China has halted NBA broadcasts in that nation since. To put that in perspective, the NBA has something like 800 million viewers in China. The entire U.S. population runs at something close to 327 million.
Equity index futures have softened very early on Tuesday morning as China indicates the likelihood of retaliation in response to the U.S. ban on those eight tech firms. Does this sound like the early stages of negotiation to you? Now, I've purchased a few autos in my day. Some expensive furniture in my day. If this is just haggling, these guys are swinging for the fences.
My Posture
The Steel Curtain. The Dallas Doomsday Defense. The No Name (Miami) Defense. The Monsters of the Midway (Chicago). All Champions. Defense, they say... is what wins championships. Circle the wagons? Not necessarily. Still exposed broadly, just allocated differently.
There has, I believe, been a great deal of positivity priced into these markets ahead of this week's negotiations, not to mention the likelihood of an easier Fed based on weakening macro-economic data. I don't even know where to start when considering the political risk to these markets. Threats to the market such as impeachment, or the possibility of an Elizabeth Warren nomination are out there, and could be very real, but probably just not today's fight.
My overall posture has been one of leaning toward the defensive, as readers know. I have no intention of making this stance permanent. I see a future that includes higher valuations based on easier money flowing out of Europe, and perhaps even created here at home. That said, this ride will be wild. Investors must protect themselves from the pressures that a failure at the table in Washington this week might place on markets that may very well come with the exclamation marks that come in the form of an escalation of this trade war, and then the impact illustrated publicly by visibly reduced third quarter corporate earnings.
Investors must remember these relationships. High levels of exposure to growth comes hand in hand with a high level of exposure to a lack of growth. Building a fortress draws resources away from such exposure. That may or may not make sense to the individual. I know from experience that lagging the market to the upside is a walk in the park compared to performing with the market (or worse) to the downside.
Thunder
Last week, JP Morgan (JPM) analyst Steven Tusa, in a 90 page publication covering General Electric's (GE) aviation unit... assessed that unit as valued closer to $30 billion versus the $100 billion or so that much of Wall Street has valued it at. Tusa believes that the unit "offers materially less growth with greater risk, and therefore less value support than consensus assumes."
Monday morning. General Electric freezes pension plans for a rough 20K salaried employees. For these workers, the plans will stop accruing new benefits. (The plan has been closed to new entrants for years) GE will contribute to a matching contributions 401K plan instead. The change is expected to carve $8 billion out of the firm's pension deficit, as well as reducing net debt from industrial operations by another $6 billion.
This brings aggregate debt reduction at the firm up to a range of $9 billion to $11 billion just in the last month. The firm has also raised $2.7 billion in reducing it's stake in Baker Hughes (BHGE) . So, is Steven Tusa, the JP Morgan analyst who has covered GE like no other, impressed yet? The short answer would be... not really.
Tusa sees the firm as still needing to "take further steps" if it is going to reduce leverage. Tusa was clear. "Ultimately, we see more cuts to consensus and additional resources as needed to truly 'normalize' the balance sheet." Tusa goes on in length, but the gist is that he does not see any real progress made concerning the firm's liability profile since where they were a year ago. Tusa leaves GE at "Underweight" with a $5 price target. Tusa has been so accurate when it comes to this name, that I would be very slow to discount his opinion.
Thought I would show you this. What I saw at first, and I was considering an equity purchase, was the formation of a cup with handle, with a pivot just above $9.50. Instead of setting up a breakout, the stock instead suffers the negative technical impact of a "death cross" just below that pivot. This forced an exacerbation in the length of the handle, and very likely may have negated the entire formation. I continue to believe that the only way to play GE is through ownership of low probability (very cheap) far-dated options. It's not like there is a significant dividend that investor would test investor patience here.
Lightning
Speaking of cup with handles. I've got one. I think. 99% of the time, I stick to daily charts for investment purposes, and intra-day charts for short-term cash generation. For some reason, while going through the ridiculously long list of names I follow, I had my chart setting on "weekly" last night instead of "daily". I am always on the lookout for potential breakouts. In theory, if one hangs on to names technically poised for breakout until one is either up 20% (or more), or down 8% (never more), then one can be wrong two and a half times the number of times one is right and still break even.
RH (RH) , the old Restoration Hardware broke out on the daily charts on Monday. This has been a very good name for us in the past. RH gained more than $5 on Monday or 3% to close at $175.41. Seemingly impressive, yet really just pennies above where the stock was one week ago. So, let's go to the weekly chart. There really has not been a plethora of news, but housing has been the strongest slice of the recent domestic macro. Take a look at the weekly chart...
Sideways off of a cup with a right side lip well above the left side? Does that mean that right now this stock stands at pivot, despite the recent daily noise. Will China headlines provide enough wiggle to get one more discount prior to a real breakout? Perhaps. Maybe just for a trade. If you go there, and I think I may, but only on a "down" morning, and this morning looks "pretty down... 20% to the upside would be $210, while 8% to the downside would be $161 based on Monday's last sale.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Sep): Expecting 102.9, Last 103.1.
08:30 - PPI (Sep): Expecting 1.8% y/y, Last 1.8% y/y.
08:30 - Core PPI (Sep): Expecting 2.3% y/y, Last 2.3% y/y.
08:55 - Redbook (Weekly): Last 5.8% y/y.
16:30 - API Oil Inventories (Weekly): Last -5.92M.
The Fed (All Times Eastern)
13:35 - Speaker: Chicago Fed Pres. Charles Evans.
14:30 - Speaker: Federal Reserve Chair Jerome Powell.
17:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AZZ) (.56), (DPZ) (2.08), (HELE) (1.96)
After the Close: (LEVI) (.28)
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