"The risk of a wrong decision is preferable to the terror of indecision." -- Maimonides
The Name of the Game
"Risk on" was the name of the game on Monday. Tensions over imminent global thermo-nuclear war receded. North Korea decided to put any attack plans aimed at the U.S. territory of Guam on hold. How sweet. The president ordered an investigation into the possible theft of intellectual property by Chinese companies, adding it to the already-in-motion investigation into the possible dumping of steel in U.S. markets. This may or may not have had something to do with North Korea's sudden cessation of aggressive gesturing toward the U.S. and American allies.
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Traders and investors could get back to worrying about quarterly earnings on a day-to-day basis, and policy that might impact currency valuations, as well as bond market yields for the medium term. The news cycle spins quickly in 2017. Trading off of market sentiment is perhaps the greatest of all skill sets. There is no doubt that in order to do so, one must be agile, quick of mind, and completely leave the ego in the closet.
There is some danger in the Pavlovian experience. Many navigating through today's marketplace have been trained through years of trial to simply buy the dip. Why? Simple question. Over what now must be considered a considerable portion of even a not quite so young person's career, markets, governments, central banks and economies in general have been able to avoid catastrophic outcomes in face of looming threats of what appear to be dire possibilities. That experience is quite different from the one that drove an entire generation of retail investors out of the marketplace a decade ago.
Those driven away have lost out on tremendous opportunity. Those who appear to know how to play this game have been right so often, they will not see it when they are wrong until they are very wrong. Such is the effect. A marketplace perverted by the distortion of the point of sale has been the cause. Do we ever find our way back to honest price discovery? I may not be young enough.
Though Monday's markets paint a generally pretty picture, two things stand out to me as somewhat special. They would be the rebound of both the small-caps, and the transports. While the S&P 500, which I'll use as a proxy for the broader equity market, was chugging along to a gain on the day of 1%, the Russell 2000 picked up 1.5% on the day. And the Dow Jones Transportation Average? A cool score of 1.6%. Dead cat bounce? Sure, some might say that. I say that if you even use that term, you might as well be honest with yourself, and admit that you just do not know.
What we do know is that U.S. small-cap equity funds saw outflows of $950 million for the week ending last Wednesday. We also know that those same funds have seen more than $10 billion worth of funds flee the space since St. Patrick's Day. The reasons are plain to see. A weakening U.S. dollar and a lack of visible progress on corporate tax reform. Tax reform would be a policy initiative that would positively impact smaller firms in far greater proportion than it would their larger cousins. What have we seen in the currency space as August has developed? Support for the U.S. dollar, that's what. The dollar has made a stand specifically against the euro in August, and more broadly against the euro-weighted basket known as the U.S. Dollar Index (DXY).
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As for the transports, they are far more dependent upon economic growth than are most other security types -- though show me something not reliant upon growth. When economies grow, there is a need to move people and materials from point A to point B. Pretty simple. Economic growth has been anemic, right? Unless it's really not. We all know that second-quarter GDP growth surprised to the upside at 2.6% annualized. Today, we'll see June business inventories. They are likely to be strong. That will not hurt when that number is revised in two weeks. The Atlanta Fed is tracking third-quarter GDP at 3.5%.
Bet you were not aware that U.S. industrial production has printed in a state of expansion for five consecutive months, after printing in contraction in four of the five months prior to that. Bet you didn't know that capacity utilization printed at 76.6% for June. That number has steadily risen from the 74.9% level where it stood in December. That's real improvement, and though you may not realize it, it's happening rather quickly. The ball is rolling, gang. We'll see more on these numbers this Thursday. This is still ahead of any progress that may be made on the policy side, and if there is to be any of that at all... nothing is priced in. Capeesh?
All Hail Nvidia
While that broader market was struggling to hold together the daily 1% gain, and while the small-caps and transports actually did show up for a fight yesterday, there was something even more interesting going on under the surface. Within the information technology sector, a group that ran 1.5% in aggregate yesterday, ran the chip stocks. Whoa baby!! Semis gone wild. The PHLX Semiconductor Index led the way to a face-ripping 2.6% increase on the day. The stocks that led the charge? Why, Sarge favorite and recent addition to the Jim Camer co-managed Action Alerts PLUS charity portfolio Nvidia (NVDA) , of course, with an 8% gain. Following NVDA were Micron Technology (MU) and Advanced Micro Devices (AMD) , both up more than 4%.
I would love to tell you how I have traded NVDA over the last week or so, but that would amount to simply bragging, and in all honesty... to tell you this tale, I would also have to tell you about some trades that did not work out well, such as my Tesla (TSLA) short. Let's not go there, except to say that I am still excited about Nvidia. The stock is up a mere 58% this year, after leading the S&P 500 in 2016. Is there more to come? Could be.
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Canaccord Genuity's Matthew Ramsey lifted his price target yesterday from $180 to $190, which helped push the name higher. Ramsey believes that Friday's pullback was the entry point that many investors had been waiting for. That's when I re-loaded. Actually, I pulled the trigger in Thursday's after-hours trading session. Canaccord was not alone. Argus called the recent selloff overdone, and re-iterated their "buy" rating, while Goldman Sachs equity strategist David Kostin placed NVDA on his list of growth stocks that allocate 90% of cash flow from operations toward growth initiatives. Rock on.
The nutshell? Gaming, virtual reality, artificial intelligence, autonomous vehicles, block-chain mining. The firm largely has a hand in virtually every relevant high-tech business right now. This is ahead of any success that the firm may see with its new Tesla Volta chips, which are currently only available for pre-order. Hmmm. Price Target? Not here.
08:30 - Retail Sales (July): Expecting 0.3%, June -0.2% m/m.
08:30 - Core Retail Sales (July): Expecting 0.3%, June -0.2% m/m.
08:30 - Control Group (July): Expecting 0.5%, June -0.1%. It is difficult to overstate the significance of this series. If we are to believe that the economy is indeed improving, we need to see evidence of it here. The market will be just as focused on this data as it is on consumer level inflation or wage growth. Fortunately, expectations are for a significant rebound across the headline, the core, and the control group from the awful numbers posted in June.
08:30 - Empire State Manufacturing Index (August): Expecting 10.3, July 9.8. The New York region is expected to print in a state of headline expansion for the third consecutive month. This will be our first look at the health of U.S. manufacturing in the month of August, soon to be followed by the highly focused-upon Philly Fed on Thursday. New orders have been stronger than backlog orders for this series, which could complicate headline results for August.
08:30 - Import Prices (July): Expecting 0.2%, June -0.2% m/m.
08:30 - Export Prices (July): Expecting 0.1%, June -0.2% m/m. Import prices have contracted for two consecutive months, and for three of the last four. For June, export prices did no better. In both cases, prices were dragged lower by one key component above all others. For imports in June, fuel prices dropped by an astounding -2.1% m/m, while for exports, agricultural export prices went to the tape at -1.5% m/m. This series is so heavily weighted in regard to these two components that it is no longer considered reflective of cross-border demand for goods.
08:55 - Redbook (Weekly): Last Week 2.7% y/y. Despite showing month-over-month contraction last week, this measure of chain store sales printed close enough to 3% on a yearly basis to keep that hope alive for the series. It has been nearly two years and three months since we saw growth like that in this space.
10:00 - Business Inventories (June): Expecting 0.4%, May 0.3% m/m. Early indications are that both wholesale and retail inventory building were very strong in June relative to recent performance. That only leaves manufacturing inventories as a possible source of weakness within this report. A print at or above expectations will not do much for the marketplace, given how dated this information is. What it can do is dress up second-quarter GDP a bit, when it is revised from 2.6% on Wednesday, Aug. 30.
10:00 - NAHB Housing Market Index (August): Expecting 65, July 64. Though still cruising at what would be considered very high levels, the "homebuilder optimism index" printed at its lowest levels since last November in July. Present and futures sales remained very strong subcomponents within the series. Weakness has been seen in buyer traffic this summer.
16:00 - TIC (June): Expecting $50 billion, May $91.9 billion. Demand for U.S. Treasuries pushed net inflows to $91.9 billion in May. Think that's not a lot? That was versus expectations of a rough $20 billion, and the most cross-border investment seen in the U.S. for any one month since July of 2016. For those keeping score, Chinese accounts were responsible for the net-purchase of $10 billion worth of U.S. Treasuries for that month, leaving them just short of the aggregate total of holding owned by Japanese accounts.
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: 2485, 2477, 2469, 2458, 2447, 2438
RUT: 1415, 1408, 1400, 1390, 1384, 1377
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: A ($0.52), URBN ($0.36)
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