Nice rally yesterday, but the "internals" were not as strong as the averages.
Well it was certainly a good day for the markets yesterday…as we got some positive news on two fronts. First, ECB President Draghi said that they were prepared to cut rates and reinstate QE if the economy were to stumble further in coming months…and President Trump & President Xi announced that they would meet at the G20 meeting next week. The rally left the S&P 500 less than 1% from its all-time highs…and gave a whole new meaning to the term “Fed drift” the day before the Fed’s announcement/press conference.
However, the internals for the rally were not very impressive. Although volume was higher than the previous two days, it was still 7% below the average daily volume for the year. Also, the breadth (advancers vs. decliners) was mediocre (at best) for a day where the averages rallied 1% or more. It was just 2.8 to 1 positive for the S&P 500, 3 to 1 for the NYSE Composite Index, just 2.3% for the Nasdaq Composite (which 1.4%) and 2.9 to 1 for the Russell 2000. These are not the kinds of numbers that you’d like to see on such a strong move….but if the global central banks are going to engage in a coordinated stimulus plan immediately, the stock market could indeed go higher.
Markets strong despite a weaker economy & declining earnings estimates.
The stock market has now rallied 6.3% in just 2.5 weeks and as we mentioned above, it’s less than 1% from its all-time highs. This has taken place despite a slightly weaker U.S. (and global) economy and a lowering of the consensus 2019 S&P 500 earnings. We have also seen long-term interest rates fall to their lowest level of this move…and to within a whisker of having a “1” handle on them. In other words, the markets are basically pricing-in a zero chance that it will receive any kind of disappointing news today. It’s also pricing-in a zero chance that we’ll get a “buy the rumor, sell the news” reaction to what every the Fed says today.
With little room for disappointment, investors should consider hedging at least some of their exposure in the options market.
Therefore, I think investors should seriously consider hedging at least some of their stock exposure in the options market. The VIX has fallen 20% since the beginning of the month, so the cost of buying protection (or making a directional bet) has certainly come down. No, it’s not as cheap as it was in April, but it IS cheaper than it has been at almost any time in the past month. The options on the SPY (the S&P 500 ETF) are very liquid (even the weekly ones are quite liquid), so they are probably the best way to buy some protection right now….……We’ve heard a lot recently about the potential that the Fed might want to “buy some insurance” with an early rate cut. Well, given how the stock market has acted recently, buying at least a little bit of insurance for investors is probably a good idea right now.
With all eyes and ears focused on the Fed’s announcement and Chairman Powell’s press conference that follows this afternoon, anything else I say this morning would just be noise. However, I just want to finish with one last comment. The White House purposely leaked the story yesterday that said that President Trump had considered firing Chairman Powell several months ago. The leak was seen as something that was trying to put more pressure on the Fed to be more helpful to the President’s re-election prospects (especially after President Trump said, “Let’s see what he does”…when asked about the leak/story). To be honest, I thought the ploy was an act of stupidity, but who knows…maybe Chairman Powell is indeed a wimp. However, there is no question in my mind that if Trump ever made a serious attempt to remove Powell, the stock market would crash. So good luck with that one, Mr. President!