Market's up. Green day. Trump Tweet on trade. Sentence fragments are all one needs to describe a pretty average trading day today, and, yet again, eroding economic fundamentals are being offset by sentiment driven by lack of information. That's how markets work. Charles Mackay posited that in the Extraordinary Delusions and the Madness of Crowds in 1841, and, more than 175 years later, his theories are once again being confirmed.
When things are going well it is always difficult to see an inflection point. Those who utter mindless cliches like "you can't time the markets" flood the airwaves with cheerleading. Every good chess player knows to think several moves ahead, though, and that's what generating alpha in these top-down ETF driven markets requires.
So, what's next? What are the factors that will drive fourth quarter moves in the markets?
Today's bond market selloff will not last. For the first time since July the yield curve - as measured by the spread between the 3-month UST bill and 10-year UST note - de-inverted today. Note, however, that the yield on the 10-year UST note is still an amazing 141 basis points lower than it was on this day a year ago. Every time there is any positive economic news (January, February, May and as recently as mid-September) the 10-year UST yield backs up and pundits call for a bond market selloff. Don't be fooled. The prevailing direction in interest rates is down. How to play? iShares 20+ Year Treasury Bond ETF (TLT) has risen more than 20% this year, an extraordinary return for a risk-free instrument, and one which yields 2.28%. Keep buying TLT on dips, such as today's.
Watch for negative earnings surprises from the U.S. banking sector. The money center big boys, JP Morgan (JPM) , Bank of America (BAC) , Citigroup (C) and Wells Fargo (WFC) , have been able to offset the inherent unprofitability of taking deposits/making loans in a period of negative yield spreads by generating additional volume. That's going to change, and that will be an unpleasant surprise for the markets. Next Tuesday is going to be a very busy day for bank analysts, as JPM, WFC and C all report earnings that day. Look for JPM to miss on the top line (consensus calls for $28.49 billion in revenues for 3Q2019 vs. $27.82 billion in 3Q2018) and profit pressures in their main businesses to hit C (credit cards) and WFC (mortgages.) I look for all three factors to impact BAC, which doesn't report until the 21st, and that is probably the best short of the four due to the time lag in reporting.
So, those are the money center banks, but don't forget that there are money center tech stocks, too. Facebook (FB) , Apple (AAPL) , Netflix (NFLX) and Alphabet (AAPL) are all headquartered near each other in Silicon Valley, and Amazon (AMZN) and Apple share the same corner of Washington state. I am avoiding the big "money center techs," the megacaps, and looking to sort some of the weaker players going into earnings.
I built my new trading firm, Excelsior Capital Partners, on profits from shorting Illumina (ILMN) , Workday (WDAY) and Tesla (TSLA) into 2Q earnings reports, and I see no reason not to repeat that strategy. I am also looking to set up short positions on Snap (SNAP) , Slack (WORK) , and possibly (UBER) UBER and Lyft (LYFT) , as well.
Don't confuse these second-tier techs with the big boys, all of which (except for Netflix) are exceedingly well capitalized and all of which have extremely high operating margins versus the native profitability generated in the other sectors of the S&P 500. It's once again time to make profits by shorting the cash-negative tech remoras that are benefiting from the money flows that go to their megacap sharks.