Late Friday. There was some hope. After all, traders expected perhaps a sizable monthly pension fund re-balancing that would have to, based on recent market action, favor equities over debt securities. Numbers thrown around were in the high single digit billions in dollar terms. Funny thing about markets, the only sure thing is that nothing is ever sure. The only thing that we know is simply that at the end of the day... we don't know. So, the S&P 500 and the Nasdaq Composite both closed the day close enough to the bottom of their ranges. The negative implication would be that traders played this rebalance to a degree that completely absorbed this "mandated" demand. Negative sentiment is a powerful force.
Declining issues outnumbered advancing stocks by nearly 20 to 1 at the NYSE, 23 to 1 at the Nasdaq. Monday morning, U.S. equity index futures have been weak all night coming off of sessions across Asia and Europe that offered little help as global manufacturing PMIs rolled in as weak as feared for the most part. The most overtly negative takeaway for the broader indices from that Friday session here in the States was the move away from the area of the 200 day SMA (for the SPX, now 2775), and from the 40 week SMA, a line that at 2668 for the S&P 500, proved to be the day's high. That line has easily been the most important moving average in terms of behavior determination over the past three sessions. Does that last? Hard to say. Obviously this is one item that those who write the algorithms have been keyed on. For that line to matter again, at any point in the short-term, there would need to be a rally of some significance basically, immediately.
The market, seems to me, to be still in the digestion mode of what is to come. I really hate the word "uncertainty", as beyond the overt implication, many across the financial landscape also use the word as a substitute for "beats me", or "I don't know." The facts are this. Tariffs in theory, raise prices. So far that view has proved to be myopic. Common sense and history suggest that increasing taxation slows spending, and might be viewed as potentially deflationary as demand slows. This is where the nervous run into Treasury securities has come from. (That, and a global search for yield.) Less demand begets less growth, which in turn creates heightened competition across the sell side resulting in compressed corporate profit margin. That's what we are pricing in, gang. Tough climate.
How to alleviate such a condition? That's not hard to figure out but may prove hard to actually implement. The Fed could slice the Fed Funds Rate on June 19th. The probability for such an outcome at that FOMC meeting is up to 27%. (Actually, the Fed can do what they need to do, without a meeting, the schedule is not part of any law.) Then there are the trade wars. According the the Wall Street Journal, both Mexico and China are sending signals suggesting that maybe they may be willing to play some ball. I would prefer that the planned tariffs aimed at Mexico late last week, might be delayed, while the two sides sort out issues at the border. If there is progress made there, as much as I disagree with the use of tariffs as a tool for the implementation of foreign policy away from commerce, they would have then possibly proven their use to be effective.
As for China, I think this is a tougher nut to crack. Much tougher. While both the Chinese and Mexican economies might be highly dependent upon a healthy U.S. consumer, and putting that consumer in short-term (hopefully) peril might harm those counties more so than the home team, the plan backfires if the Communist Party in China simply favors remaining in unchallenged control over the economic welfare of the Chinese people. For markets, this would be mean further pain. There is also talk that perhaps President Trump benefits more if the trade conflict comes to an optimistic looking conclusion closer to the 2020 election. We all remember how popular President George H.W. Bush was in the months after Operation Desert Storm, yet as the economy weakened in 1991, so did the favorability that he had enjoyed with the populace.
The U.S. Economy
Many will correctly point out that the U.S. economy is still quite strong, that there is momentum and that of all the dirty shirts in the hamper, this one stinks the least. If there was ever a case of "yeah, but" this is it. Yeah, but, April was fairly awful from a macro point of view. We'll hear from the auto industry today. That's been a sore spot. Housing has clearly been troubled. Retail Sales have been softer. Industrial Production, Durable Goods, all fairly lousy. This is "Jobs Week." The backbone of U.S. economic strength in recent months has been the labor market. Demand has been there, both for numbers and to an increasing degree, even wages. This demand has actually been supported by robust Q1 production versus labor associated expenses. In an otherwise weakening trend, can the labor market remain strong?
The yield curve has become badly inverted for a reason, you would think... unless the Fed's removal of free market pricing in credit markets has rendered that entire market useless as a leading indicator for the broader economy. What we do know for sure (I think) is that consumer confidence begets small business optimism, that in turn improves and maintains demand for labor. The question is how fragile is that chain. What if the shale boom burps? What if retailers continue to close locations or reduce staffing due to the changing nature of that business? What if larger firms across the financial space, in this prolonged era of reduced net interest margin, decide to reorganize impacted departments?
Whether the message is still valid in the wake of what central banks have done to capitalism is debatable, but the yield curve is screaming for attention, and it's not telling us that if we close our eyes and count to 100, everything will be okay.
Hopefully by now most traders have some dry powder at the ready. It may or may not be the time to pull any triggers but we all just had a weekend. There are likely some shopping lists that have been refined over the past two days out there among you. I am a lot like you in this regard. One thing I like to do, don't always do, but like to do when shopping at a discount, is see some kind of semi-reliable pattern develop before becoming heavily entrenched in a name. Does not have to be anything that special. A simple basing pattern can mean that institutional selling has at least paused to catch their breath.
While we have long preached incremental purchasing here, who really needs at a time like this to have to think about averaging down because they made an impulse purchase based on what they see on a given day. That's why they put the candy near the register, to try to squeeze you out of a dollar that you would not have spent. You don't need candy. It rots your teeth. That said, it's more than okay to miss a bottom, just as it is to miss a top. The higher probability trades are made with more information. Perhaps be less aggressive on the first day where it looks like buyers might make a stand. It may be on the second or third day where once this basing seems to be holding that one witnesses a rising price on increased volume. A higher likelihood of victory might be attained. Yeah... no kidding Sarge, you say. How many are truly that focused I say. It's not fail-safe. The pundits with zero skin all tell you to "be careful" in these markets, without telling you how. This is one way to be careful.
Bloomberg reported on Friday evening, that the Department of Justice could be preparing an antitrust probe into Alphabet's (GOOGL) Google unit. The firm has already been fined several times by the European Union for alleged abuses in the ad search business. Is the U.S. about to get active here? What does this mean for other internet based businesses that appear to be dominant forces in their fields such as Facebook (FB) , or Amazon (AMZN) . The interesting thing here is that this is also the case with the pharmaceutical space. Criticism comes form both sides of the aisle in Washington. That's never helpful from a shareholder perspective.
You May Have Noticed
Not only have a number of software/cloud names held their 200 day lines, a few have held both their 50 day, and 200 day lines. ServiceNow (NOW) , for example, even though lower with the markets, still closed a rough $6 above it's 50 day SMA. That brings me to Microsoft (MSFT) because that name literally closed at the 50 day line (actually 37 cents above). I want shareholders to take a look here.
A ways back, I drew up this chart for you. Cup with Handle worked like a charm. The Pitchfork would still be perfectly in tact. That said, I have now added the purple lines to show you a flat basing that has developed at the top of the chart. Support for this base, which is also near the 50 day SMA, is now under pressure.
Sometimes this support works out just fine. Sometimes when you knock on a door more than once, it opens. I like Microsoft. A lot. This is a case where I need to see higher pricing on higher volume in order to feel comfortable. This is where being careful is worth it. At least to me. Especially in this environment.
Want This One?
Talking about dip buying. I have long coveted the shares of Zscaler (ZS) without taking a bite. Waiting for a pullback that never seemed deep enough. Are these guys the future of cyber security? There's a chance. At least the focus here is on the gateway security stack, through a cloud based architecture. What that means to my feeble brain is that as a means of application of a "zero trust" mentality, an organization's defense is compartmentalized, much in the way that a ship's hull might be in order to prevent losing the entire vessel in a disaster. In addition, by zero-trust, everyone is an outsider, even insiders.
On Friday morning Zscaler beat fiscal Q3 expectations for both EPS and revenue. Year over year revenue growth pained a picture of 61% growth. This comes on top of revenue growth of 65%, on top of 59%, on top of 54%, on top 49%, on to of 53%... you get the picture, I think. The firm is expected to post a full year profit in 2019 for the first time, and actually guided both full year EPS and revenue above consensus. Still, the shares sold off hard on Friday to the tune of 6%. Why? Profit taking.
The shares are still expensive. Triple digit PE ratios. Negative profit margin. There is sufficient operating cash flow though, and the current ratio suggests that there is no immediate threat of not meeting obligations. In short this one is on my list, yet I continue to have no position.
See what I mean? Oh, there's volume alright. Down volume. I do want this one on my book, but I'd be a cheap old you know what. I lay out my dough, it's going to be on my terms. I need to support to present (perhaps at 64, if not... 61), and then I need to see volume support higher pricing. The good thing would be that management still owns 27% of the firm. There was some selling by insiders in May, but mostly by one individual, so I do not yet consider that to be all that alarming, but it is something to follow up on. Long this one later today. No. Later this week? Perhaps. You know the drill.
Economics (All Times Eastern)
All Day - Total Vehicle Sales (May): Expecting 16.8M, Last 16.4M annualized.
09:10 - Fed Speaker: Federal Reserve Gov. Randal Quarles.
09:45 - Markit Manufacturing PMI (May-F): Flashed 50.6.
10:00 - ISM Manufacturing Index (May): Expecting 53.0, Last 52.8.
10:00 - Consumer Spending (Apr): Expecting 0.5% m/m, Last -0.9% m/m.
13:25 - Fed Speaker: St. Louis Fed Pres. James Bullard.
21:45 - Fed Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BOX) (-.05)
After the Close: (COUP) (-.04)