The thrill of price discovery. The thrill, indeed, of witnessing directional swings in the major equity indices taking place in response to a spoken word, or a headline. Instantly.
We all know that these shifts occur in microseconds, because milliseconds are too slow, and then momentum takes the shift further out than it would have if the action had been reliant upon the development of an ancient, but long-forgotten practice. The word "sentient" comes to mind. That word describes perception based on reason.
Have the markets willingly sacrificed the ability to reason at the altar of speed, solely because greater speed increases the likelihood of profit? Over and over again, as slightly slower bots are forced into action across a fractured marketplace. Microseconds at some point will become too slow. Then what?
The open outcry market model was too slow. Too susceptible to human error, they say. Trading in eighths or sixteenths was absurd. Again, they say. They all know, but hope you do not, that a centralized, ongoing two-sided auction market model where nothing can trade without being represented publicly, nothing can trade unless agreed to, and nothing can trade outside of a quote visible to all participants, nearly ensured the right price at the right time. The sixteenths? Decimals are fine. In nickels. Combine that with the central location, and bang... there might just be a thicker book of bids and offers in every stock. Conducive to block trading. Conducive to sentient price discovery. Ah, heck. Don't listen to me. (They never have.) I'm just a dinosaur.Meaningful?
Tough question. The broader equity indices all saw serious declines on Tuesday, the S&P 500 down 1.6%, the Nasdaq Composite down 1.7%. Trading volumes were higher than they have been, suggesting an increase in professional participation, yet trading volumes remained below longer-term averages. All 11 sectors met the "ugly stick," the banks perhaps hit the hardest as a group. Staples and REITs out-performed while still closing lower.
The Dow Jones Transportation Average suffered badly, down 1.9%. Remember the death cross that we brought to your attention Tuesday morning? And yet the airlines significantly out-performed the rails. Ahead of Delta Air Lines (DAL) earnings on Thursday morning? More likely on lower crude prices, as that commodity is looked upon as an expense for the airlines and as cargo for the rails.
There are two forces pulling and pushing last sales around this week, and the impeachment headlines in Washington, at least for now, have nothing to do with it. China and the Fed. That's what traders are paying attention to.China
You probably already know the Trump administration's Commerce Department blacklisted 28 Chinese entities, including eight Chinese tech firms, due to their involvement in human rights abuses. China responded by threatening retaliation. President Trump's State Department responded to that by indicating that visa restrictions would be imposed upon Chinese officials linked to these abuses in western China. This news is what knocked the stuffing out of equity prices on Tuesday afternoon. China here on Wednesday morning has re-iterated a willingness to still reach a limited deal of some kind that would increase Chinese purchases of U.S. agriculture and other goods, but not solve the more significant issues that are considered structural by the Trump administration. This news is precisely why equity index futures were trading higher through the zero-dark hours.
Bear in mind that the higher-level talks do not even start until Thursday. Until then, everything we hear can be considered shadow boxing. The only thing we know for sure is that both sides benefit short term from a limited agreement, but that neither side is willing to concede their longer-term strategic view in order to benefit the short term. The Oct. 15 deadline for increased tariffs is still very real... until it is not.
The risk at this point would be a trade or strategic cold war upon a failure at the table of negotiation this week. How will we know just how bad it might get? You've already heard rumblings of excluding Chinese equities from inclusion among pension fund holdings due to the fact that these stocks are not held to the same disclosure rules as are U.S. corporations. This could be broadened to not just exclude these issues from pension fund holdings, but possibly exclude them from benchmark indices provided by U.S.-based operations. That would be highly significant.Mandates
Federal Reserve Chairman Jerome Powell spoke from Denver on Tuesday afternoon. He'll be in Kansas City here on Wednesday. Yes, you will hear from the chairman for a third day in a row. I think it important for investors to understand a few items as we move forward.
For one, Powell refers to data dependency as the "heart" of Fed decision making. Understand this: Data dependency is the heart of the problem, and is why the Fed has been consistently behind the eight ball in its timing for as long as I have been around. To be "data dependent" is to simply swing and miss. Policy makers should always move with an effort aimed at being anticipatory. Heck, we can all see what happened already. Why do we need anyone for that? Get out in front. Skate to where the puck is going, not where it's been.
Just how tight are labor market, Powell asks. I am glad he is unsure, and honest about it. Chairwoman Janet Yellen had trouble with the Phillips Curve as well, and the honesty is both admirable and refreshing. That said, let me help.
Labor markets have remained strong, but as we have already made an ice hockey mention, the ice grows thin. Productivity is clearly slowing. September Small Business Optimism confirmed what we learned in both the ISM surveys for September, namely that employment appears to be on its way to softening, as it is now one of the weaker components in these surveys. We know from Bureau of Labor Statistics (BLS) numbers last week that upward pressure on wages is starting to wane.
So, labor markets remain strong, but there are cracks in the pavement. That takes care of the maximum employment mandate.
Let's look at price stability. We now know that wholesale prices rolled off of a cliff in September. September consumer prices are due on Thursday morning, and we do know that core prices have been rapidly getting hotter over the past three months. Should core consumer prices confirm what the Producer Price Index (PPI) just told us, that these prices are indeed under control, then the door is open. Open? Yes, to do what needs to be done.To-may-to, To-mah-to
Jerome Powell did allow that the time had come to expand the balance sheet in the near term in response to the recent dearth of liquidity in overnight money markets. (See what I mean about being anticipatory, instead of data-dependent? That's a nice barn. The horses are down the street.) Powell also mentioned a lower trajectory for the fed funds rate. Again, this is roughly five months after the crucial spread between the 90- day Treasury bill and 10-year note inverted, and remained so. Now, the overbearing macro shows signs of weakening. They like to blame the trade war. OK. So what? Improvise. Adapt. Overcome. Yes, we know there was a trade war. Skate to where the puck is going. Seems reasonable. No?
Jerome Powell was emphatic. He wants the public to understand that when the Federal Open Market Committee (FOMC) does go about expanding the balance sheet through
a program of asset purchases that he does not consider this action to be one of 'quantitative easing" meant to stimulate the economy, though it sure smells like it to me. Call it POMO (Permanent Open Market Operations), call it John, or Tommy. I don't care. Just get overnight liquidity markets right. The end of the quarter and increased Treasury issuance should have never caught the New York Fed off guard. Gee whiz.
Now for the fun part. As Jerome Powell has been public about not using the term "quantitative easing," Minneapolis Fed President Neel Kashkari has been just as public about returning to this quantitative easing in order to ease market liquidity if need be. Kashkari even talks about using the Fed's tool kit with "more confidence" and "more powerfully" than these tools had been deployed in the past.What's Hot?
You kids see the multiline retailers on Tuesday? Markets in beat-down mode. All 11 sectors deep in the hole. The SPDR S&P Retail ETF (XRT) traded 1.45% lower for the day.
Yet all rules have exceptions. Target Corp. (TGT) and Walmart Inc. (WMT) closed higher on the day as Raymond James had initiated Target with a "Strong Buy" rating. Analyst Matthew McClintock (5 stars) also placed a $130 price target on the name, stating a belief that high single-digit to 10% earnings growth could be maintained. FYI, over the past few days, Target has announced new or increased levels of partnership with Walt Disney Co. (DIS) , and TruKids Brands, parent of the new "Toys R Us" brand name.
Staying with retail, Kohl's Corp. (KSS) also closed slightly higher. Do I consider buying back my Kohl's here? The shares did close right at the 50-day simple moving average (SMA) line. If that cracks to the upside, the discount will likely evaporate. Then there is the sustainable (I think) annual dividend of $2.68, good for a yield of 5.5%. Sound good for a revenue-based portfolio.
In Target, I see a gap that has not yet filled. I see a stock trading at a 23% premium to where it traded prior to that gap higher. I took profits in response to this move. I like the name, I need a discount that pulls the last sale at least toward that 50-day SMA to even think about re-entry, despite the opinion of Raymond James.
I do like that Walmart has seen recent support at former pivot. I do see a technical case for a share price around $130. I would rather wait to kiss the 50-day line here, but am cognizant that a break above $120 could be sustained for the medium term.
Kohl's is the one. I think. A taking of that 50-day SMA could propel these shares back toward levels close to $55. Should that happen, the need to fill works for the investor, not against. Not getting the low here, but maybe catching momentum in real-time. If wrong, they do pay you to hang around. Kohl's, which is part of Jim Cramer's Action Alerts PLUS charitable trust, reports of Nov. 19.
Trade Idea (minimal lots)
-Purchase one KSS Oct 11 $49 call (Value: roughly $0.60)
-Sell one KSS Nov 22 $45 put (Value: roughly $1.95)
Net credit: $1.35
Note: The trader exposes him or herself to equity risk at a net basis of $43.65 post-earnings, while obtaining the right to pay $49 this Friday should the 50-day line crack to the up. In that case, the trader's net basis would be $47.65, given that the Nov. 22 puts eventually expire (not a sure thing).
Economics (All Times Eastern)
10:00 - JOLTS Job Openings (Aug): Last 7.217M.
10:00 - Wholesale Inventories (Aug): Expecting 0.4% m/m, Last 0.2% m/m.
10:30 - Oil Inventories (Weekly): Last +3.104M.
10:30 - Gasoline Stocks (Weekly): Last -228K.
13:00 - Ten-Year Note Auction: $24B.
The Fed (All Times Eastern)
11:00 - Speaker: Federal Reserve Chair Jerome Powell.
11:00 - Speaker: Kansas City Fed Pres. Esther George.
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant earnings releases scheduled for Wednesday.