"The price of anything is the amount of life you exchange for it." -- Henry David Thoreau
The trajectory of equity market gains, already moving at a steady pace all year, has actually picked up some steam of late. The Dow Jones Industrials scored a cool gain of 2% last week. All of our broad indices seem to be hitting new all-time highs on a fairly regular basis. The naysayers claim severe overvaluation. I'll recognize that point to a degree, but as I have said before, 19 times forward looking earnings is not severe, and I only care about that space where the rubber meets the road -- price discovery, perverted or not. Being right about how wrong the markets might be will only lose you money, or at best prevent you from earning anything in the short to medium term. One had better come from some family money, or at least earn a handsome base salary, if one can afford to take such a long view, and remain patient.
In the meantime, there are still upside catalysts apparent everywhere. You would think that at some point around here, from both a sentimental point of view as well the analytical, there would be some profit taking in here soon. At the minimum, smart traders will cash in some principal on winners, and leave as much "house money" at risk as possible.
U.S. Dollar Valuations
U.S. dollar valuations popped on Friday in response to the Senate's passage on Thursday night of that budget resolution. The obvious thought is that lower corporate taxes, increased stimuli for business, repatriation of funds held abroad, and lower individual taxes will produce growth, and they will. Was that the correct reaction? Deficit growth, in actuality, you would think might weaken the dollar. There are other forces at work. Upward pressure has been placed on the dollar Monday morning, as the yen hit 114 versus the greenback last night in the wake of an overwhelming victory by Shinzo Abe's Liberal Democratic party's coalition in Japan. The two-thirds "super majority" gives Abe the green light to continue with his considerably aggressive economic policies. These policies have produced not only economic growth for six consecutive quarters, but Japan's strongest labor market in 40 years, and have placed the Nikkei 225 at 21-year highs. Never mind a debt to GDP ratio running at roughly 250%, and consumer price inflation that continues to hang around the flat line. These people now have hope. Hope can be powerful.
There's more. As Madrid seeks to establish firmer control over Catalonia, we now have two regions of Italy voting for greater autonomy from Rome. This should put some weakness on the euro, which could provide some important camouflage as the ECB (European Central Bank) decides on policy this Thursday. There is some broad speculation that the ECB will at least announce plans to further taper their asset purchases, down from the current €60 billion per month going forward. Though expected to a degree, just how much will this strengthen the euro with mild to severe unrest making headlines in key member economies? Difficult to price in.
Current and projected dollar valuations are key to these markets, as much as are interest rates. Do we have to worry about who the next Fed Chair is, and where the fed funds rate goes? Of course, though I am not really sure that yields on the longer end of the curve can keep up with the shorter end. That could present problems of its own eventually. We are not there yet, and I really think that we may have as much as half a point to the upside for yields on the 10-year before equity markets would, in a vacuum, acknowledge that threat. Of course, nothing happens in a vacuum, and we do have to discuss the evolving Fed, just not today. So let's stay on topic.
Third-quarter earnings are off to a largely positive start; 77% of reporting corporations to this point have beaten EPS (earnings per share) expectations. Earnings growth is currently running at 6.3% year over year, while revenue growth stands at 6.4% right now. Both are well above expectations. A weaker dollar is certainly a major contributory force at work here, as it has been for at least the last two quarters, both of whom sported double-digit EPS growth. This run will be put to the test this week, as only 88 companies residing within the confines of the S&P 500 are in the books for the quarter, and another 175 are scheduled to report this week. Then, there is oil, the lifeblood of the energy sector.
With the supply/demand dynamic coming back into balance, with geopolitical tensions rising in northern Iraq (and elsewhere), with the possibility still dangling that OPEC and pals will extend their production cuts, just how important is this battleground around the $52 level for WTI? And just how important might it be to those hoping to find support here, that the DXY does not approach $95 or $96? Hmm. Food for thought.
Chart of The Day
This morning, we look at the DXY, also known as the U.S. Dollar Index. Now, real currency traders look at individual exchange rates, and not this particular index, which is heavily weighted toward the euro. For most of the rest of us though, this item remains a loose guide on what the dollar is doing and where it is headed. You can see here that after that pop two weeks ago, the index had largely gone sideways, and the moving average convergence divergence (MACD) had become moderately confused, though at a positive level. Throw in the upward movement seen in Relative Strength and the obvious room between the 50-day and 200-day simple moving averages, and I think it is plain to see that 94 resistance will be tested on that election news out of Japan this morning.
Should that level crack, the area around 96.25 becomes very interesting. My thought is that this index could be in this range for quite some time to come, which would force U.S. multi-nationals to do some heavy lifting in forward looking quarters. Put bluntly, this makes corporate tax reform all that much more of a focus.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2595, 2587, 2578, 2571, 1563, 2557
RUT: 1527, 1521, 1513, 1508, 1500, 1492
Today's Earnings Highlights (Consensus EPS Expectations)
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At the time of publication, Stephen Guilfoyle was long HAS, STX, although positions may change at any time.