Does The Market Make Sense Right Now?

Equities start the day higher as the market settles in to a place that kind of makes sense to me. That’s a weird statement right?  How often does the market make sense to anyone? Bear with me, and if you disagree with all this make sure to flame me on Twitter (@bullandbaird). We’re off to the best start in 30 years right after the worst December since the Great Depression. If you wanted a reminder of how difficult markets are to navigate, well, there you go. Why have we bounced so hard? Well, the Fed went full “open the Olympic games and fire off the doves,” economic data started beating expectations, earnings are slowing but haven’t collapsed, housing appears to have bottomed (more on this later), and sentiment hasn’t reached lofty levels alongside the market. That being said, sentiment IS inching higher and my friend Helene is on watch for it to be over its skis. Remember, markets don’t trade on good news or bad news, they trade on better or worse, and things didn’t get WORSE from what we thought was happening at the end of 2018. In fact, things seem to be getting better right? The trade war seems to be thawing, the gov’t isn’t going to have another stupid shutdown, people are optimistic about their financial future, and while we are likely to see earnings growth stumble I think the market is trying to price that in here. So what would downside look like? A retest of the lows? It would take a few months and start with the aforementioned sentiment moving too far in the bullish direction, it would probably accelerate with a massive earnings decline, and it would plummet if the world really does slip into some kind of Global recession and animal spirits die like my January diet. But right here, as we recapture the 200 day MAVG and sit ~6% below the all-time high, I think the market makes sense with what it’s doing.  

After the open we saw a decent early morning rally evaporate after Marco Rubio decided he wanted to go off about stock buybacks. I guess we’re at that point in History where there’s no good boogeyman out there so faceless corporations are going to bear the brunt of public outrage because apparently they like low risk ways of returning capital to shareholders. Man, how bland is that, can we get a new Cold War or something? Imagine the 2045 documentary on the US vs stocks buybacks, would make a 4hr lecture on convexity seem like Die Hard. Anyway, since we only breached the 200 day yesterday I guess we needed to churn lower to see what happens. Winners were HLT, FCX, ATVI, GPN, and GE (did I really just type that?) Losers DISH, TRIP, CERN, JWN, and RL. Can we talk about housing for a second? That sector got absolutely demolished last year as rates rose, affordability seemed out of hand, and people wondered if the cycle had peaked. The housing ETF, XHB, fell 35% from its peak and many of the companies that make stuff that go into the construction of a home fell 40-60%. DEMOLISHED. So why does this matter? Housing is a spectacular economic indicator so let’s check in and see what’s happening now. The sector has bounced…hard...and that has to be viewed as a positive if you are bullish. By lunch we were drifting around 2,752 up 0.20%.  Hey…you want a good idea for Valentine’s Day? Give your spouse a gift of free time. That’s right, skip the lame flowers and tasteless chocolate, tell them that you love them so much they get all of Saturday off to do whatever they want. Oh and if you’re dating with no kids then I don’t know what to tell you, the last time I was single cellphones didn’t even exist.  Maybe get them a magnetic lamp or a keyboard shaped waffle maker (no wonder my wife hates me). 

The rest of the day was a bit snoozy and we closed at 2,753 up 0.3%. Not bad, a late day selloff piqued my interest but we did manage to stay above the 200 day so all’s well that ends well.  So in the first paragraph I mentioned what a retest would look like, what does the upside look like? I think it’s going to have to involve no gov’t shutdown, some kind of broad stroke deal with China, and then the hard part: global growth to resume.   Europe and China are still a mess, we need some kind of green shoots there before we shift into a higher gear. Unfortunately that takes time, so I think we’ll end up grinding these levels for awhile keeping an eye on sentiment. We don’t want it to get out of hand… 

Final Score:  Dow +46bps, S&P500 +30bps, Nasdaq +8bps, Rus2k +31bps 

News Highlights:

We’ll end tonight with one of my all-time favorite types of Fail videos. The one’s where Gravity wins…(I bet you can’t watch 2+ mins)

Have a good night