If a Tree Falls
If a tree falls in the forest and no one is around to hear it, does it make a sound? Equity markets traded slightly higher on Wednesday. For the most part. The Transports did come in, just a little. The S&P 500 closed right at the top of the chart, above the 3,000 level. Again. Market participants were so excited that trading volume contracted from already below average levels on Tuesday at both the New York Stock Exchange as well as the Nasdaq Market Site.
Interestingly, though the S&P 500 closed at the highs of the day and Wednesday was in fact the second up day of the week, this high was the lowest high of the week's three trading sessions. Want to talk tech? Okay. The Nasdaq Composite also rallied into the close and also posted the second up day of the week on Wednesday. Yet, the high of the day for the Nasdaq Composite on Wednesday turned out to be the lowest high of the day for that index since October 14. Does that sound healthy?
The fact is that looking back at the 23 trading days since the "quadruple witching" of simultaneous expiration events on September 20, that trading volume attributable to the Nasdaq Composite has closed above its own 50-day simple moving average just six times, while failing to reach that moving target 17 times. For the same period, volume for the S&P 500 has topped its own 50-day SMA just four times, falling below that moving line 18 times, having landed precisely on the mark one time.
Mind Over Matter
Why come up with this statistically driven nonsense? Is Sarge just a numbers-driven madman who stays up all night writing numbers in marble notebooks with a pencil and then erasing them half of the time? Well, yes. That is however a separate issue. JP Morgan (JPM) unofficially kicked off "earnings season" on October 15. You would think that trading volumes might have expanded since then. They have not. Large-cap equity indices over a month have churned on lackluster interest outside of the high-frequency crowd.
So what has performed best over a one-month period? Of the eleven sectors, REITs are up 2.2%, taking first place. Utilities are in third, with Staples in fourth and Health Care in fifth. All sectors considered to be traditionally defensive. The Financials are in second place over that timeframe. That would be largely due to the un-inversion of the 3-month/10-year Treasury spread, as the Federal Reserve has taken action that will both target the lack of liquidity in overnight cash markets through balance sheet expansion while correctly targeting the short end of the curve.
Even if you don't understand what the Fed is doing or how I explain it, know that I think that they are doing the right thing here, and I have been no shrinking violet when it comes to criticizing policy decisions made by this group. Still, the Financials are a value-oriented sector based upon the narrow premiums seen in share price to tangible book value. Plain and simple, the group is cheap.
Five sectors have seen an increase of 1% or greater in their SPDR sector select ETFs over the past month. Four might be considered defensive (though health care remains a political football), with one an overt value play. That puts the Industrials, Materials, Discretionaries, Information Technology and Energy in the barrel. They are all somewhat reliant upon economic growth. In fact, among these six "less hot" sectors, the Industrials, though sustained through growth, also contain many industry groups that would be considered value types. Just throwing that out there.
Hop the Fence
Now, let's look at those Industrials, as that is where the fence is currently being straddled. Within that group, Trucking is hot. Take a look at the Dow Jones U.S. Trucking Index.
What else is hot? The rails are hot. Now, take a look at the Dow Jones U.S. Railroad Index.
Over the past month, the Nasdaq Composite is trading 1.6% higher, with the S&P 500 up 1.3%. The Dow Jones U.S. Trucking Index? Up 5.4%, The Dow Jones U.S. Railroad Index? Up 3.5%.
The investing public is clearly dragging their feet, as have I. Revenue-driven safety still seems to be what the investor seeks at this time, with so many uncertainties staring us in our collective face. Yet, there is clearly a large bet in place that cargo is going to move. A lot of cargo. Somebody somewhere is willing to bet on a trade deal between the U.S. and China.
Whole Ball Of Wax
It is important for all of you to understand this, as you need to be able to defend yourselves as well as your families. Threats to financial well-being or wealth preservation can come from four avenues of attack. These threats can be monetary, commercial, political or geopolitical in origin. A threat originating in any one of these areas can spill over into the others. This is how the greatest of all threats, the systemic or structural, can impact a nation, or even a planet.
We cannot fully defend average families from a systemic collapse caused by negative input somewhere in a complex system. I have written on "Complexity Theory" in the past, and I am sure I will again, but this piece is already lengthy and we both have work to do. How you defend yourself against that is through holding some portion of one's wealth off of the grid. Maybe we should get back to where we were going.
As to the monetary threat, the Fed is taking it seriously, which is all we can ask, in a world that has forgotten who Von Mises even was. As the nation approaches a general election with one side embracing socialism, of course markets will have to learn to live with ongoing political threat, and the geopolitical is almost impossible to predict. Commercial threats, though? If we see an amicable Brexit deal in the medium term and a U.S./China trade truce that lasts (doesn't even have to be a deal), and that eases any threat from this particular arena. For the time being. Trucking and the Rails. Makes sense.
I really have so much more that I want to tell you this morning. However, time runs short, as does your patience. I understand. I have likely lost most of you by now, and for the ones that got this far, I know your head hurts. You all already know that I love you. Remember this. It's not about how smart you are. It's always been about how tough you are. We are tough.
They say winning isn't everything, that it's the only thing. That's a bunch of bull. Perseverance is winning. The joy is in the fight itself, and there is no joy in individual glory. Teamwork. Support is a two-way street. Now, go look upon those sleeping faces in the other room that bear your name. They are your reason why. They are why we will rock this day. They are why you rise every time you fall. They are why you are still and always will be... the undefeated.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 215K, Last 214K.
08:30 - Durable Goods Orders (Sep): Expecting -0.6% m/m, Last 0.2% m/m.
08:30 - Ex-Transportation (Sep): Expecting - 0.1% m/m , Last 0.5% m/m.
08:30 - Ex-Defense (Sep): Expecting 1.3% m/m, Last -0.6% m/m.
08:30 - Core Capital Goods ( Sep): Expecting - 0.1% m/m , Last -0.2% m/m.
09:45 - Markit Manufacturing PMI Flash (Oct) : Expecting 50.6, Last 50.7.
09:45 - Markit Services PMI Flash (Oct): Expecting 51.0, Last 50.9.
10:00 - New Home Sales (Sep): Expecting 703K, Last 713K SAAR.
10:30 - Natural Gas Inventories (Weekly): Last +104B cf.
11:00 - Kansas City Fed Manufacturing Index (Oct): Last -2.
The Fed (All Times Eastern)
Fed Blackout period through 31 Oct 19.