"Do not be afraid to make decisions, do not be afraid to make mistakes." -- Carly Fiorina
Fork in The Road
Tech stocks, for the most part continued Friday's declines into Monday. That said, there really was no doubt, as the day developed, that so had some support for the sector. Those looking for a catalyst for the tech beat-down will have to look hard. It could be as simple as this slice of the equity market being where the profits were. It could also be a couple of downgrades, one last week, and one early yesterday (Mizuho Securities) suffered by consumer favorite Apple (AAPL) , a holding of the Action Alerts PLUS portfolio, which Jim Cramer co-manages as a charitable trust.
You will have to take note that every one of these high-flying growth stocks finished yesterday's trading session multiple dollars, and in most cases multiple percentage points, higher than they were earlier in the morning. You'll also have to notice that energy names did move higher in yesterday's trade, but the financials? Not so much. The Russell 2000? Heck, the small-caps closed in the red. So, our "grand rotation" theory still needs to pass a few tests before we can put that one in the books as fact. This leaves traders with two distinct possibilities.
The first possibility would be the nastier of the two. This selloff, rather than being some kind of rotation, broadens out and becomes an equity market correction. I don't think that this would completely shock anyone. Forward-looking valuations are still elevated by historical norms, although I really don't think that in the current environment one should be using historical norms to value equity performance. Still, enough people do to make this concept a force that must be taken seriously. Second-quarter earnings are still expected to show a healthy year-over-year increase, and I think that will ultimately provide a net.
It's a given that there will undoubtedly be this broad correction at some point. That's why I consistently preach diversification and discipline. Oh, and by diversification, I don't just mean across the equity space; I mean across the broader landscape of investment possibilities. One must also be mentally prepared. On the day you wake up and everything is gone, put on your pants, brush your teeth, and tape on the foil. Adapt. Improvise. Overcome. What the heck else are you going to do?
Sunny Side of the Street
The second of these possibilities is a far more optimistic outlook. The premise here is that this selloff was exacerbated by algorithms, and human traders would not have taken it quite so far. The trend would then remain intact and "auto-correct" to the upside. What that makes is an opportunity to score some shares at prices missed. I try to do everything that I do in measured fashion, and I try to button up as much as I can when I smell danger.
That said, this is how I looked at yesterday's trade. If you read me often, you know that I sold my stake in Amazon (AMZN) just ahead of its run over the $1000 mark, and was looking to buy it back below $950. I thought I might get my chance on Friday. I waited, finger on the trigger, for 20 minutes into the close. No cigar. Still waited into the Monday morning. Yesterday presented me with my target. Bang! $945, low of the day. Why am I telling you this? The importance of having a plan. The importance of having a reason for everything you do. I had a target price in AMZN. Target met, shares sold. Level met, shares bought. Act when a stock allows you to execute your plan. Don't force anything. Cash is better than rash decision-making. The stock could go up or down now. I could get hit in the mush. Doesn't matter. I already sold higher, and bought back lower. Mission accomplished. Makes the day more fun, and the intellectual challenge of properly executing your plan makes showing up all that much more worth it.
The Point Is
We are not helpless. The market beats us up? So what. We figure it out, and we move on. As long as you've got clean water and you're not freezing at night, then quit your whining. You are already way ahead of the game. Wake up early. Work late. Bring your brain, and your work ethic. Rock on.
Hawk at Heart
The Fed is certainly in focus this week, and will make a policy announcement tomorrow. We'll get after them then. However, I think the Bank of England has just been put in a tougher spot than they already were. Did you guys see those inflation numbers out of the U.K. this morning? The May data hit the tape this morning much hotter than anticipated. CPI, core CPI, and their retail price index all printed well above expectations. The question now becomes, with the BOE meeting this week, how long can the central bank tolerate inflation that runs above its target? Perhaps this is a reason that Theresa May's snap election didn't go so well.
With economic growth, consumer confidence and wage growth disappointing expectations across the U.K., not to mention the imminent Brexit negotiations, there is serious pressure on the BOE to hold its fire on tightening policy conditions. That is what is expected this week, and likely that is what they will do. Now, we all know from Mark Carney days at the helm of the Bank of Canada, that this is at heart a hawkish guy. If inflation continues to move away from the economic reality of the British people, he will have to act before long. This bears closer watching than most are giving credit, and will slap currency markets around. The pound is already trading considerably higher in response. FYI, gang -- big night ahead for Chinese macro. Futures will move around overnight tonight.
06:00 - NFIB Small Business Optimism Index (May): Actual 104.5, April 104.5. Though this slice of soft data peaked in January at the highest level since 2004, the headline number has not really come in all that much since then. Today's numbers held close enough to April levels. Disturbingly, though, small businesses painted a picture of declining inventories and a lack of urgency in replenishing those inventories.
08:30 - PPI (May): Expecting 0.0%, April 0.5% m/m.
08:30 - Core PPI (May): Expecting 0.2%, April 0.4% m/m. Headline PPI has been running hot and cold in volatile fashion from month to month. Overall, inflation at the producer levels has seen more lift than it has at the consumer level. Year over year, April PPI printed at 2.5%, which compares 2.2% for the CPI. Contraction in energy prices is expected to negatively pressure the core print for May.
08:55 - Redbook (Weekly): Last Week 2.5% y/y. Not that retail has been saved, because it has not, but 2.5% on the year-over-year number is about as good as this measure of chain store sales has had it since the start of 2016. Perhaps all of the store closings are starting to help the space through attrition.
13:00 - 30-Year Bond Auction: Treasury looks to auction off $12 billion worth of 30-year paper today. This comes one day after a fairly strong (or at least stronger than last month) 10-year auction that saw bid to cover rebound from the poor showing in May. Indirect bidders took down more than 66% of that issue. The last similar auction to today's took place on May 11. That day, Treasury sold $15 billion worth of 30-year debt. Bid to cover was weak that day, and the indirect crowd only took home 58% of the goods.
13:45 - Fed Speaker: New York Fed Pres. William Dudley will speak today on the impact of banking regulation on capital allocation. I really do not think I have seen, at least not in recent times, a voting member of the FOMC make a public appearance in the middle of a policy meeting. I guess as long as he doesn't go near monetary policy.
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: 2457, 2447, 2439, 2428, 2420, 2410
RUT: 1433, 1426, 1420, 1413, 1403, 1396
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (HRB) ($3.53)
What's Hot on TheStreet
Respect the stock charts: Don't feel too relieved by volatile tech name Nvidia (NVDA) finishing in the green on Monday after a violent selloff.
Nvidia underwent a "key reversal" on Friday that could send the stock plunging another 36%, BMO technical analyst Russ Visch said in a new note. Visch points out that normally, these pullbacks tend to lead to the stock falling back to its 200-day moving average. In the case of Nvidia, the 200-day moving average is $96.70, or $36% below Monday's closing price of $149.97. "Considerable downside risk exists here," said Visch.
On Friday, shares of Nvidia were off to another big rally, hitting new all-time highs of $168.50 following an analyst pontificating the stock could surge to $300. But the party abruptly ended Friday afternoon and continued into most of Monday's trading session. The reversal in one of the hottest tech stocks around spooked the market, pressuring shares of other high-flyers in the space such as Amazon and Apple.
Apple and innovation: The reality of the here and now is that the public and would-be buyers of Apple's stock harbor greater doubts about Apple's ability to innovate than in many years, reports TheStreet. Apple did nothing to quiet those concerns by introducing its new voice activated speaker, sources explained to TheStreet.
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