Welcome to the jungle, it gets worse here everyday
You learn to live like an animal in the jungle where we play
If you got a hunger for what you see, you'll take it eventually
You can have anything you need, but you better not take it from me
- Adler, Stradlin, McKagan, Slash, Rose (Guns N' Roses), 1987
Out in the Bush
Sometimes not very far is indeed far enough. While traversing an unfamiliar environment (Of course this is pre-GPS - GPS can be knocked out, btw.) it makes sense once ascertaining which direction one wants to move in, to find something, anything out on the horizon, or at least out a few hundred yards, after shooting your azimuth (with a compass) and move toward that landmark. It could be anything. Church steeples are nice, if one is near civilization. Power line towers are excellent.
Often enough though, there will be nothing man-made where you are or where you are going. Often enough impassable terrain features will interrupt your, and your team's progress, thus making things like laminated maps, protractors, grease pencils, and beads that help keep track of steps taken invaluable items when out in the wilderness. Lose any of these items and most likely you lose yourself as well as the individuals counting on you. Know your stride? Know how far you've moved.
Have to move around a cliff or known (artillery/mortar) impact area, one better know how far off course one has moved and in precisely what direction. Better have a working understanding of geometry while you're at it? I used to love hearing kids say, "When are you ever going to use any math other than arithmetic?" Never know. One day lives may depend on your understanding of the relationship between angles and distance. Don't be wrong. Twenty-five feet off at 15 or 20 kilometers can mean missing something crucially important. Especially in areas offering little in the way of visibility, such as a rainforest.
Out on a long-range patrol deep in the rainforest. Everyone gets a map. I don't care if you're some kid who finds himself terrified by land navigation. Out in the rainforest, the landmark you shoot that azimuth toward is often the next tree, sometimes just a few feet away. The more times you stop and shoot a new azimuth trying to stay on course, the greater the probability for human error.
That's why, every kid has a map, and access to a compass. That's why, we move where I say we move, but I have at least one other individual following along very closely. I want his counsel. I want to know if he thinks I am slightly off course. We have to do this as a team, as we take baby steps, as we never lose sight of where we are trying to get to and what we are trying to accomplish.
The Where
No more holiday-shortened four day trading weeks. At least for a little while. Washington's Birthday or Presidents Day, or whatever they call the February holiday now is coming, but not just yet. Traders are now set to embark on a period of four consecutive five day work weeks. Where are we? Where are you trying to get to? Have you shot your azimuth? Do you have a goal? Or goals? Is anyone else working in collaboration? In a surefire bull market, we can aim for that water tower out in the distance and just simply move in that direction.
In this environment, just as in the rainforest, it's almost tree by tree. What then if we slip? You do know that the rainforest is very slippery, don't you? The lay of the land beneath the canopy is alive, and is always changing. The animals are dangerous. Especially at night. Much of the vegetation is covered in thorns. I don't care how thick your gloves are. They don't call them Black Palms because of their leaves, it's because you are going to end up impaling the palm of your hand on one of those long black thorns as you grasp for anything once you slip. And slide. Hurts. Only for a second. Really looks cool as long as there is no poison in the thorn. Then it stinks.
Back to navigating the environment. Tree by tree. Chat by chart. Guidance by guidance. Balance sheet by balance sheet. Macroeconomic data-point by macroeconomic data point. Fed meeting by Fed meeting. If it sounds like today's investor must at least be functionally literate as a trader, economist, analyst, and policy maker that is because a trader must indeed. Traders and investors must be a jack or even better than a jack of all financial disciplines. Just keep moving. If something gets in between you and where you are going, use your skills, know how far out of your way that you must travel, and know exactly what must be done to get back on course. No blind guesses. Only facts, truths and when necessary, highly educated guesses with close to known probable outcomes.
Last Week
Financial markets are still trying to price in the uncertainty or probability of any coming economic recession later this year and an even higher level of uncertainty over said recession's potential severity. On the corporate side, earnings season is off to a somewhat weaker start than usual. According to FactSet, with 11% of the S&P 500 having already reported, 67% of companies have beaten earnings expectations, while 64% of companies have reported revenue generation that beat Wall Street. Sticking with FactSet.... at this point, the blended (results & estimates) year over earnings decline for the S&P 500 is now -4.6%, down from -3.9% just a week ago. Revenue growth is now running at +3.7% for the quarter, down from +3.9% last week at this time.
From a macroeconomic perspective, the week past was a hot mess, dominated by the December PPI report, December Retail Sales, and December Industrial Production. While the PPI came in on the cool side, which was nice....both Retail Sales and Industrial Production printed in a deep state of contraction, and as far as Retail Sales were concerned brought a downside revision for November with them. Both of those items are quickly moving in the wrong direction for the economy, but the right direction if one is hoping that the voting members of the FOMC somehow start acting on the now outdated concept of data-dependency.
Additionally, regional manufacturing based surveys out of both the New York and Philadelphia Federal Reserve districts printed in contraction with New York teetering on the brink of something cataclysmic in nature. All of this forced the Atlanta Fed to revise their GDPNow model for the fourth quarter down to growth of 3.5% (q/q, SAAR or seasonally adjusted annual rate) from 4.1%. This is still a bit on the rosy side as the consensus of private sector economists for that number seems to be around 2.6%.
The plethora of horrendous looking macroeconomic data allowed yields to collapse last week and Fed Funds futures trading in Chicago to run roughshod over central bankers left clinging hopelessly to their inexplicable intent to raise overnight rates to something potentially well above 5% and leave it there until either their 2% inflation target is reached or the cows actually do come home.
Concerning the FOMC policy decision scheduled for February 1st, futures trading in Chicago are currently pricing in more than a 99% probability for a 25 basis point increase being made to the Fed Funds Rate at that time. Futures show that this hike will be followed by an 82% likelihood for another 25 basis points on March 22nd that gets the Fed to 4.75% to 5%, which would be the terminal rate. Futures also now show a 59% chance for a first rate cut in November and a 54% shot at a second rate cut in December.
Conflicting Signals
Equity markets still look somewhat range-bound, but remain nearly pegged to the upper bound of said declining range. That make much sense? While the Nasdaq Composite still has a ways to go in order to make a run at its 200 day SMA (simple moving average), the index has retaken its 50 day SMA after finding support last week at its 21 day EMA (exponential moving average). The S&P 500, as readers can see here, has made like a ping pong ball of late and been batted back and forth between its 50 day and 200 day SMAs, while still being unable to break through the year long upper trendline of our descending, broadening wedge.
This could be bullish as "descending broadening wedges" are seen as bullish patterns of reversal. Is this that breakout? I don't know. Consider this...
A rough 62.4% of the companies in the S&P 500 are now trading above their respective 200 day SMAs. I have told you many times that portfolio managers tend to increase and decrease long-side exposure at both the 50 day and 200 day SMAs, with more focus placed on the 200 day line. This could be seen as evidence of a lasting change in trend as the 50% level was tested in late December and the index passed that test.
That said, I want you to take a look at this...
This, at least since August.... looks like a bearish running triangle. Points A,B,C,D, and E are in order, the August high, October low, late November high, mid-December low, and early 2023 high. So, do we have a descending broadening wedge or a running triangle? Given that points A,C, and E happen to be at descending highs while points B and D happen to be at ascending lows, this could be seen as a bearish and not bullish running triangle.
So, what is now the truth? We have one rather advanced technical pattern signaling a potential breakout, while another advanced technical breakout signals a potential top. This sure will be an easier story to tell in hindsight. So, we move to baby steps until we have a more biased feel. One tree after the other, working as a team, until there is a break in the clearing. Of course we'll have to move around that clearing so as not to be spotted but you get my drift.
Marketplace
For the past four trading days, the S&P 500 gave up 0.68% after gaining 1.89% on Friday. The Nasdaq Composite rallied 0.55% last week after gaining 2.66% on Friday. The Philadelphia Semiconductor Index, which is something that I always watch closely, lost 0.21% last week, after soaring 3.11% for the final session of the week, while the Russell 2000 surrendered 1.04% for the week after moving 1.69% higher on Friday.
Nine of the 11 S&P sector-select SPDR ETFs shaded red for the week past, as only Communication Services (XLC) , Technology (XLK) , and Energy (XLE) went green for the four days. The Industrials (XLI) gave up 3.39% to lead equities lower, as the Utilities (XLU) , Staples (XLP) , and Financials (XLF) all lost at least 2%.
According to FactSet, the S&P 500 now trades at 17.0 times forward looking earnings, down from 17.3 times last week. This ratio remains significantly below the S&P 500's five year average of 18.5 times, and has once again fallen below its 10 year average (17.2).
This Week
The coming week will be one of the first exceedingly heavy weeks of Q4 earnings season. For the week coming, investors will hear from 3M (MMM) , Danaher (DHR) , General Electric (GE) , Johnson & Johnson (JNJ) , Lockheed Martin (LMT) , Raytheon (RTX) , Union Pacific (UNP) , Microsoft (MSFT) , Boeing (BA) , IBM (IBM) , Tesla (TSLA) , Mastercard (MA) , Intel (INTC) , Visa (V) , American Express (AXP) , Chevron (CVX) , and many others. I would consider Intel, Microsoft and Tesla to be the headliners for the marketplace in general, though for me... the defense contractors will take center stage.
There will be no Fed speakers out there impacting markets through the impact of high-speed, keyword reading algorithms that skew price discovery in this modern era. Thankfully, the central bank has entered into its pre-policy meeting media blackout period and our central bankers have had to slither from their now stalled clown car into their respective holes.
I think it is common sense that the Fed should have paused and taken a "wait and see" approach at least a few months ago. At least, though they are at this point a minority, there are now a few officials at the Fed that are starting to sound like they do understand this. Knock, knock... there has been and will be no wage-price spiral. It's okay to try to preserve employment at solid levels. If a recession were to be averted, the focus on labor market preservation had to start in late 2022. Late is still better than never.
As far as the macro goes, there is not quite as much to look at as there was last week, but there is enough. Headline items include our first look at Q4 GDP, December Durable Goods Orders, December New Home Sales, December Income and Outlays, and then finally, PCE and Core PCE inflation for December. All of these higher profile events will cross the tape either on Thursday or Friday.
Now, go and have a most excellent week.
Sarge out.
Economics (All Times Eastern)
10:00 - CB Leading Indicators (Dec): Expecting -0.7% m/m, Last -1.0% m/m.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BKR) (.40), (SYF) (1.13)
After the Close: (BRO) (.46)
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