Maybe...
Maybe Not. Sell in May, and go away? May the day never come. Sunday. A pure numbers day. Chart by chart. Real impressive, by some measures, but do I trust this? This what? This potential change in trend. The Atlanta Fed revised their model for real-time GDP three times last week. That snapshot of national economic growth now stands at 1.4% (q/q, SAAR), the May employment situation ultimately shaving a tenth of one full percentage point off of the running model. Bureau for Labor Statistics employment data for the month disappointed across the board.
While job creation printed at 75,000 for the month, downward revisions totaling 75K to the two months prior left the net gain for May at zero. Yup. Zero. Wage growth slowed, at the same time an expected bump in average weekly hours failed to materialize. Together this all raises necessary questions about the labor market itself. Is demand for labor slowing? Is supply the issue. Participation remained steady at 62.8%, as did the Employment to Population Ratio at 60.6%. To me, those numbers allow for the idea that plenty of slack in labor supply does still exist should the dynamics of the domestic economy warrant further expansion in business investment.
Sometimes
The cleanest shirt in the hamper is still pretty dirty. Recent, domestic macro-economic data, particularly April numbers across the board displayed a U.S. that perhaps was reverting to mean, globally, in response to conditions slowing enough on their own. Then add the negative impact of escalating trade wars. Not really arguing the validity of using trade as means of negotiation, however, one must recognize the implication that increasing basic costs of doing business does change the picture. The Fed, for the most part, has signaled a group readiness to react to the impact that these changed conditions might have on the broad economy. This has pushed the likelihood of a rate cut at the FOMC policy meeting this July up to 81%, according to futures market pricing in Chicago.
The announcement that U.S. and Mexican leadership had reached a deal that avoids the implementation of a schedule of rising tariffs that would have started this morning has added to the upside momentum, though the already reached USMCA trade deal still has to be ratified in all three countries, and the weapon-zation of tariffs could change the dynamic down the road elsewhere. (Germany?)
This sets the table. Now, we must choose whether or not to dine. Or do slightly higher yields across Treasury markets present as a buying opportunity? Hmm.
Worms and Grasshoppers
The one market condition that I wrote to readership all week, last week, was to keep their focus on through this rally, on finding a day where prices increased on higher volume. Simple enough. Such a condition would imply larger institutions had joined the fray on the side of investment, and could define for the individual trader whether or not long side positions could be defined as investments or not.
Well, the market failed once again to give me what I am looking for. While NYSE listed advancing volume beat declining volume by nearly two to one on Friday, Nasdaq listed advancing volume trounced declining volume by a rough three to one. However, in both cases, trading volume trailed off from Thursday, and hit the tape in considerably lower size than a week earlier when prices were quickly headed in the other direction. I am not downplaying the significance of this rally. I think it tremendously encouraging that the S&P 500 re-took it's own 50 day SMA (simple moving average) on Friday. Still, trading volume across S&P 500 constituents in aggregate declined every single day last week from the day prior. Do we really need confirmation? To trade? Not at all. To invest? Maybe. Maybe not. There is still more risk in this trade than some might have the stomach for.
That said, the S&P 500 will soon have some company. The Dow Jones Industrial Average appears ready to take that 50 day line on Monday morning based on where equity index futures are trading. Keep in mind though that both the transports and the small caps lag the rest of the market badly. Both the Dow Jones Transportation Average and the Russell 2000 remain well below their respective 50 day and 200 day SMAs. A weaker dollar environment, that might be a condition produced by a more dovish monetary environment, while better for asset prices in general removes one reason that draw investment dollars away from multi-national large caps.
Does this all mean that those who dove into this rally early have made a mistake? If only it were that cut and dry, we would all be relaxing on a beach somewhere on Monday morning instead of trying to get these brain cells fired up. What confirmation of a change in trend does for me is reduce (my opinion) exposure to risky behavior. Early bird gets the worm. Sometimes. I've eaten worms. They're really kind of gross. Grasshoppers are much better. Kind of nutty, if you take off their heads and their legs. That said, worms are easier to find. You do "get" this, right? I'm telling you to take what you can get, while the getting is good, while not getting over-extended. At least until hot chow arrives. If it arrives.
Sunday Night Football
Not exactly. More like Sunday Night Charts. I really must say, even if the big money is not yet behind this market, there are many stocks that I follow that are setting up very nicely from a technical perspective. I go over my set-ups very carefully at times like this. I may be wrong, I won't write a lot on this, until I see some real dough behind the moves, but last night, I raised my target prices for roughly 18% of my longs. Remember, I run a tight ship. When I raise target prices, I also raise panic points. This way, if I am wrong about the trend (very possible), I reduce size above net basis. Then as stocks decline, I never (never ever) allow a net loss to exceed 8% (or the random number of your choice, that's mine) without letting some air out of the tires. Unless it happens on a gap. You can always add the shares back on either cheaper, or amid a bullish reversal.
Under-perform to the upside? Who cares? As long as your kids still get new shoes when they need them. Under perform to the downside? That'll ruin you. The key would be to free yourself of judgment when making the correct decision, and then suffering a poor result. They say that "the trend is your friend." It really is. They say "a rising tide lifts all boats." It really does. The vast majority of stocks will move with trend, once a trend is confirmed. Any moron can make money in a bull market. The real challenge... the reason why I can remember a lot more faces than I can names, is having discipline in place that allows one to take a lesser beating than the broader market, when the market is in beat-down mode.
Cold War Marriage
With all of this excitement, our brewing Cold War over regional and global spheres of influence (You thought this was about trade? Foolish mortal.) with China, has forced some merger activity across the aerospace and defense industry. I am sure you all have noticed how hot defense names (not defensive names, though they're hot too) have been as the negotiations between Washington and Beijing left the church full, but the altar empty.
So, it is that United Technologies (UTX) , and Raytheon (RTN) head off into the sunset hand in hand in a "merger of equals." The new company will be known, according to the Wall Street Journal, as Raytheon Technologies Corp. This despite the fact that UTX shareholders will end up with a 57% stake in the new entity, while RTN shareholders end up with 43%. There is a lot of good here from my point of view as a Raytheon shareholder. The focus on the new firm certainly looks to be on aerospace, as some other unrelated business lines on the UTX side, such as Otis Elevator, and Carrier air conditioners, will likely either be spun off or sold by next year. Some of the beauty of this deal is this: The two firms compete for the same clients, but necessarily in the same exact markets. Overlap is considered minimal. While Raytheon is best known for perhaps Tomahawk and Patriot missiles, as well as work on anti-missile defenses, United Technologies manufactures parts for military aircraft. Annual revenue for the combined firm, based on 2019 estimates would come to roughly $74 billion, placing the new firm in second place in the industry, only behind Boeing (BA) ... and how reliable are projected 2019 sales for Boeing at this juncture?
The upshot? Through economies of scale, the new firm would expect to reduce some $1 billion in annual expenses. The downside? UTX brings a lot of debt into the combined operation. RTN, the better current ratio. The deal has RTN trading above $200 in the wee hours. Last sale on Friday night was below $186. The enticement would be the expectation to return somewhere between $18 billion to $20 billion in capital to shareholders over the first 36 months post-completion of this deal. My thoughts? I think though I like the deal, that I take the money and run. I can always get re-involved later if I so desire.
Some Target Price Changes (My Opinion)
Adobe Systems (ADBE) : Target Price from $340 to $370, Panic Point from $244 to $265.
Advanced Micro Devices (AMD) : Target Price from $37 to $39, Panic Point from $25 to $28.
Cisco Systems (CSCO) : Target Price from $63 to $70, Panic Point from $50 to $54.
Walt Disney Company (DIS) : Target Price from $140 to $170, Panic Point from $110 to $130.
Microsoft (MSFT) : Target Price from $129 to $1432, Panic Point from $101 to $123.
Walmart (WMT) : Target Price from $124 to $128, Panic Point reiterated at $96.
Note: Of course I'm talking my book.
Economics (All Times Eastern)
10:00 - JOLTS Job Openings (April): Last 7.488M.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (THO) (1.66)
After the Close: (CASY) (.53)
(Cisco, Disney and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells CSCO, DIS or MSFT? Learn more now.)
