Weakness leaving the body. At least that's what we were told as teenagers. Seems to me, now many (and I mean many) decades later that pain probably could also be described as capital leaving the portfolio. I look at my social media feeds, and my e-mail correspondence all day long. What I see in abundance is pain. Anguish. Day after day, with alarming regularity what has always been a give and take market has certainly taken more than it has given over the past three months.
The Nasdaq Composite closed less than 20% below it's all-time high in late August. Hard to see this as any kind of victory as the index spent roughly 20 minutes in bear market territory on Thursday afternoon. Much is being made of the higher trading volumes at these lower levels for the major indices than traders saw earlier in this methodical, modern version of what some are already referring to as a stock market crash. I am not making light of these volumes, but conviction is a much tougher sentiment to gauge in that way now that human traders are no longer at the controls.
Algorithmic trading is triggered by so many variables having little to nothing to do with sentiment, be it technical levels, straight key word, or headline seekers, down to the broad overshoots related to large programs that exist thanks to the popularity of a more passive style of investment than we used to see. Speaking of volume, today (Friday) is a "Quadruple Witching" expiration event. For those retail traders who always wanted to know, but were afraid to ask, a quadruple witch happens quarterly, and is trader slang for a Friday where index futures, index options, single stock options and single stock futures all expire on the same day.
This creates an environment where the closing auction can become a volatile event all in itself. Professional traders will be trading off of published "market on close" imbalances in increased size as the session winds down later in the day. Do not be alarmed by this event, nor it's outcomes. The Monday that follows these events is usually a very quiet day in terms of trading volumes, and that impact will likely be exacerbated by the half day session in front of the Christmas holiday.
Whack a Mole
Volatility had already increased dramatically without any help from an expiration related witching hour. The VIX kissed the 30 level on Thursday. That lasted for about as long as the above mentioned Nasdaq Composite remained in technical bear market territory. While it's easy to blame the reduced volatility on the pace of the Fed's quantitative tightening program, and the negative directional movement of these markets on the Fed's overt effort to cap economic growth at a time when economic growth appeared to be slowing on it's own (in my opinion this is likely a policy error in the making, you already know that), there really are so many other contributions being made to this selloff that reside far away from the realm of monetary policy.
The still Republican controlled House of Representatives passed on Thursday evening a package that would keep at bay a partial government shutdown, while providing funds for President Trump's border wall. This package has very little chance of getting through the Senate and ever reaching the president's desk in it's current form. The Senate, by the way, had already voted to keep the government open until February and many have likely already gone home for the holiday, making themselves unavailable to vote on this addition. (Nice work if you can get it.) This potential shutdown is currently being priced in by financial markets, and should this stalemate break before tonight (meaning that these "poor" souls will have trekked back to DC), there will be a broad relief rally felt across the street.
Needs to Be Said
Honestly, I don't like to comment on politics. I have political views. Everyone does, but my primary function is that of a market professional. That makes me at least publicly something of a financial mercenary. These next two items are of political ilk, but these are not opinion, they are observation. I am having trouble with the resignation of General Mattis as Secretary of Defense. The man is something of a super hero among the troops. His departure and the way it was done, though respectfully, will leave the administration in a position of political volatility that will impact markets.
Secondly, I need to point out, and this is not a statement in favor nor against "the wall", that the reason so many are against the building of this wall is that it is expensive. Mexico does not want to pay for it. Congress really does not want to pay for it. $5 billion is a lot of money. To put that in perspective, the one time cost of building this wall equals just 10% of what the Fed is draining in terms of potential liquidity from the U.S. economy every single month. In other words, over the course of a year, the Fed will withdraw through it's QT program a dollar amount that equals 120 times what the president has asked for to build his wall. Think about that the next time some amateur on financial television tries to tell you that policy is not impacting liquidity. Of course it is. Why on earth do they think equity valuations had reached the levels that they had by the end of the loose money era. It doesn't take a genius.
What Now, Sarge?
The trend is your friend. This adage has worked very well over time. Throughout the course of the long bull market it made sense to cast a very large net. Be long a lot of different stocks. Be long a lot of shares in certain stocks. One's mistakes could easily be brushed aside by the number at the bottom of the screen. Now that the trend has turned, the trader's way of thinking hopefully has as well. Santa may still show his ugly face. You still may have a mild January effect. The facts are that until international trade issues are resolved, until energy markets find some fundamental support, and until the Fed signals a less hostile monetary environment, the trend is against growth, and will favor value as well as capital preservation.
That large battleship that was so difficult to steer, should be a patrol boat by now. Agility is more important in the current market than is scale. I am sure that everyone has noticed their defensive holdings suffering a lesser decay than the rest of their book. The Utility sector is the only sector still in the green over a three month window. This, even though from a performance perspective, the Utility sector easily finished 11th out of 11 sectors in terms of revenue growth for the third quarter. Even worse, looking into the future, the Utility sector is also the only sector projected to suffer from an aggregate contraction in corporate revenues for Q4. While truly intellectually interesting, I find this to be a far more honest measure of market fear than the VIX could be. While algos now rule the point of sale for both equities and options markets...There are a lot of places where sector allocation is still the result of human decision making.
I'm a Runner
Not a marathoner or anything like that. I run for conditioning, and I compete in short races, like local 5k's and 10k's. I always think that I will just run this one for fun, and then as the race wears on, I become competitive and try to medal in my age group. As Father Time has done a certain amount of harm, I have watched my fastest mile (yes, I still keep track every year) lose about a minute and a half since high school. The point is that I do keep track. I still try.
That said, I have never been a fan of Nike (NKE) running shoes. I find the sizes just don't match up well with a person's real world shoe size. I find myself slightly more prone to minor injury when I run in Nikes. For running, New Balance is more my speed. However, Nike is the one that went to the tape last night.
Just Wow!!
Nike reported an EPS beat and a sizable increase in revenue for the firm's second quarter. The underlying data, as well as the earnings call were impressive, and I mean really impressive. There is so much positive vibe here that it becomes difficult to describe. Both the Nike and Converse brands exceeded expectations. Higher input costs were countered to the point that there was indeed an expansion in gross margin.
How did they do that? In several ways. First the firm was able to drive higher average selling prices through it's Nike Direct platform. The firm now says that they see, and I quote, "potential to have digital be the majority of our business." They do this while still touting successful promotions through the likes of retail giants like the Foot Locker (FL) ,and Dick's Sporting Goods (DKS) chains. More on that below.
But wait, there's more. North American revenue was strong at 9% growth, but revenue realized from the Greater China area increased by 26%. Nike has now experienced revenue growth of 10% or more from China for every quarter over a four and a half year period. Trade war? Nike says that as a firm, they see no impact. Whoa. Can't remember the last time I heard any executive of any large multi-national corporation say anything like that.
The Most Interesting of Charts
The Good... This name obviously hit support at the center trend line of my Pitchfork model just before this earnings related pop. That became necessary after the 61.8% retracement level off of the entire 2018 move had broken.
The Bad... The daily MACD? Money Flow? Relative Strength? They stink like a hamper full of used athletic wear.
The Ugly... I know you saw it. The "Death Cross" That's why the algos hit this name so hard this week ahead of earnings.
The Trade
The stock is trading above $73 as I bang out this note, well above the Thursday close of $67.53. Want to buy it? Be my guest, but there is a good chance that if you are not already wearing them, these horses have left the barn. Above $74 (the intersection of the 50 day and 200 day SMAs), I think this name is probably ripe for a rental short as long as I get myself flat before the close (Quadruple Witch... Don't be a hero over what is nearly a four day break.) If one does carry short side risk into the weekend, one also needs to purchase a December 28th call up in the $78 area just to protect one from oneself. Know what I mean? That said... If not, I remain approachable. I also generally like both people and puppies.
Note: I may just put a bull call spread on in either Foot Locker (FL) or Dick's Sporting Goods (DKS) if the shares come in after they ramp a little. Both firms report in February and some of this may be in the sauce.
Another Note: Answer to a reader question. Core Capital Goods Orders today... much bigger deal than is the GDP revision. Need to see some growth there. Any growth at all.
Economics (All Times Eastern)
08:30 - GDP Growth (Q3-F): Flashed 3.5% q/q SAAR.
08:30 - Personal Income (Nov): Expecting 0.3% m/m, Last 0.5% m/m.
08:30 - Consumer Spending (Nov):
Expecting 0.3% m/m,
Last 0.6% m/m.
08:30 - PCE Price Index (Nov): Expecting 1.8% y/y, Last 2.0% y/y.
08:30 - Core PCE Price Index (Nov): Expecting 1.9% y/y, Last 1.8% y/y.
08:30 - Durable Goods (Nov): Expecting 1.7% m/m, Last -4.4% m/m.
08:30 - ex-Transportation (Nov):
Expecting 0.3% m/m,
Last 0.1% m/m.
08:30 - ex-Defense (Nov): Expecting 1.0% m/m, Last -1.2% m/m.
08:30 - Core Capital Goods (Nov):
Expecting 0.3% m/m,
Last 0.0% m/m.
10:00 - U of M Consumer Sentiment (Dec-F): Flashed 97.5.
11:00 - Kansas City Fed Manufacturing Index (Weekly): Last 15.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 873.
Today's Earnings Highlight (Consensus EPS Expectation)
Before the Open: (KMX) (1.00)
