Market Recon: The First Quarter Has Been Achilles' Heel in Recent Years

"Price is what you pay. Value is what you get."

-- Warren Buffett

Price Discovery

The day began innocently enough. Equity index futures were strong. Oil was strong. We knew that on the first trading day of the year that there would be capital inflows. We also thought that there might be aggregated pent-up tax-related profit taking.

Yes, equity markets were soft last week, but that was more of a rebalancing. I'm talking about folks hanging in there until the calendar turned, in the hopes of surrendering less of their hard fought gains to Uncle Sam.

Well, the marketplace witnessed both forces at work yesterday. After initially opening into strength, stocks, crude and natural gas all went into free-fall as early morning faded.

For nat gas, it was warm weather. Cabot (COG) , EQT Corp. (EQT) , and Range Resources (RRC) all were hit with the ugly stick. For crude (think there's resistance at $55?), it was will they, or won't they, cheat (they will). For equities, it was the already spoken about cross-breeding of interests.

Stocks came back strong late in the afternoon, as 10 of 11 sectors turned green. Financials, healthcare and tech led the way with energy. Energy ?? Yes, the sector rallied with stocks, although the underlying commodities never left the grasp of those concerned with a strong U.S. dollar and those already mentioned issues.

I did tell you that January would be violent, and, my friends ... this is just getting started. Soon, maybe as soon as today, or maybe tomorrow, the inflows will dry, as will the tax-related selling. Then, you'll have a stock market that is almost priced for perfection vs. performance that might not be so perfect. Keep in mind that every year of late, the first quarter has been the Achilles' heel of this economy.

Everyone Is Talking About Gold

Gold is suddenly a topic that has people talking again. While I am not ready to change my 5% sample portfolio allocation, which I just re-affirmed last week, there is no denying that there has been increased demand for the yellow metal for a couple of weeks now.

On top of that, gold has been the topic of increased chatter in my e-mail correspondence of late, so it is clearly what the retail crowd is talking about right now. My thoughts on this are that you could see another $100 on this current leg if the macro plays along. If the macro plays along, understand?

The FOMC is not considered likely to increase the fed funds rate on Feb. 1. We have December "Jobs Day" (wage growth) this Friday. Over the next week and a half or so, we'll see December data for retail sales, industrial production, and consumer level inflation. All of these areas were weak spots in November. If these specific areas show a change in direction and improve alongside the housing and manufacturing space, that could spell trouble for our favorite precious metal, at least in the short term.

Musical Chairs

Speaking of the FOMC, let's not forget that the composition of this committee changes every year. For our newcomers, when learning about this group it's important to remember that the Fed chair, four governors, and New York all have permanent voting seats at the "big kids' table. The four non-permanent spots rotate among those other 11 regional district presidents.

Losing their votes as we move into 2017 are Cleveland (Mester -- hawkish), Kansas City (George -- hawkish), Boston (Rosengren -- hawkish lately), and St. Louis (Bullard -- dovish lately). Taking over for those four will be Chicago (Evans -- perma-dove), Minneapolis (Kashkari -- dove), Philadelphia, and Dallas (Harker and Kaplan -- both thought to be centrists).

Clearly, should the perception change towards a need be to go slower on tightening policy, the doves are in place to make that happen. I do think that the ball is in motion toward a higher interest rate environment. If justifiable, that is what is desirable right now. That said, the ball may roll more slowly with this committee than it may have with the past crew.

Macro

All Day - Total Vehicle Sales (December): Expecting 17.7 million, November 17.9 million annualized. Vehicle Sales do seem to be improving. After the very strong finish put together by the industry for 2015, things tailed off a bit, but have heated up again of late. Over the last five months, total sales have averaged an annualized pace of 17.8 million after averaging a pace of just 17.0 million for the four months prior to that.

This item is spread out piecemeal over the day by the individual manufacturers, so there will be now "Wow" moment that hits the marketplace. Auto sales, though, are a key component of headline retail sales. You will see that number a week from this Friday.

08:55 - Redbook (Weekly): Last Week 2.1% y/y. Unlike many measures of retailer health, this weekly has been consistent in its week-after-week showing of strength over the year prior throughout the holiday season. For most of 2016, this item struggled to show year-over-year growth of 0.5%. It has now been 10 weeks since any single week came in that light. a print in the 1.0% to 1.5% range would be considered acceptable for today.

14:00 - FOMC Minutes: Although some level of importance is always placed upon these minutes, I'm just not too sure how many brain cells you're going to need to deploy on this today. This information is three weeks old. The FOMC is comprised differently, and slanted toward the doves, at that.

The CME website is only giving the probability of another increase for the Fed Funds Rate a 4% chance at the February first announcement. Still, there will be something in here that makes somebody nervous -- probably needlessly.

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: 2273, 2267, 2259, 2250, 2244, 2234

RUT: 1383, 1376, 1366, 1356, 1349, 1339

Wednesday's Earnings Highlights

Before the Open: STZ ($1.71), MON (-$0.02)

At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.

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