Morning Comment: We will NEVER forget.

  • Scooby-Do, where are you?
  • Will Trump continue to follow the script on trade?
  • The "rotation" is algo driven right now.
  • A "tradable" bounce in rates or a long-term change in trend?
  • Tech will face headwinds for many, many months.
  • AXP near key support, RTN testing resistance
  • We will NEVER forget.

Scooby-Do, where are you?

When I was a kid, my favorite Saturday morning cartoon was Scooby-Doo. I didn’t mind that it was the same script every week…when they followed the same theme surrounding Arthur Conan Doyle’s “The Hound of the Baskervilles” featuring Sherlock Holmes. (You remember….each Scooby Doo episode always entailed a villain who was trying to find something valuable…but needed time to find the “secret hiding place”. Therefore, that person would use an old legend to try to scare everybody away from the “search area”…so that the villain had time to look for the “treasure”……When the villain failed, they would say, “My plan would have worked if it wasn’t for those darn kids!”)

Will Trump follow the script & turn more hawkish on trade again?

Let’s hope President Trump doesn’t continue to follow the same script HE’S been following much of this year in the stock market right now. Every time the stock market falls in any material way, President Trump goes out and tweets something very dovish about the trade negotiations. HOWEVER, when the stock market rallies towards new highs (like it did in late April and late July), he goes out and says something very hawkish about this key issue. In other words, with the S&P back up within 2% of it’s all-time highs, it’s getting to the point where the President should be turning more hawkish on trade once again.

Of course, this will only be the case IF Mr. Trump continues to follow the same script. Given that we’re now 14 months from the 2020 election, maybe he’ll finally change the script. However, we don’t think that he’ll give-in quite that easily…at least not yet. Yes, China did suggest yesterday that they’d be willing to buy more of our agricultural products, so maybe the President will accept that…and declare victory! However, as much as the President has wimped out in the past, we believe he’ll wait a while longer…given the elevated level of the stock market. This does not mean that he’ll “follow the script” and make another hawkish comment on trade, but we seriously that doubt we’ll see an important resolution on the subject any time soon.

The algos are driving the group "rotation" right now....will it last?

Anyway, we saw more of the same yesterday…as the bond market continues to work-off the extreme technical overbought condition that had developed over the month of August. The yield on the 10yr note has now bounced 19% since the day after Labor Day (and the TLT has fallen almost 5%)…so our call for a meaningful short-term reversal in the bond market has been spot-on. It has not led to much of a move in the broad indexes the past three trading days, but it HAS led to a “rotation” among groups within the broad market. However, as we said yesterday morning, these moves in both the bond & equity markets have merely been technical ones…that are working off some extreme technical conditions that built up as we moved through the month of August.

A lot of people are saying that this is a major long-term turning point for the markets…and that this “group rotation” is a very long-term development. The problem with this thinking is that the catalyst for this rotation has been a technical move in the bond market, not an important turn in the economy. Therefore, you’ve got to believe that the interest rates are going to move a lot higher over time if you agree that this “rotation” will persist for an extended period of time.

A "tradable" bounce in LT rates vs. a long-term change in trend.

That does not mean that it cannot continue for a while. The bond market was the most overbought it had been in decades, so it could/should take more than just a few days to work-off this condition. (As we said last week, we’re looking for a “tradable” bounce in rates…not just one that lasts a few days). However, the main reason this rotation has taken place is because the algos have been programed to give us this kind of rotation if rates rise…and not because the economy is suddenly beginning to improve.

What we’re saying is that if you think the mild slow-down in domestic growth has come to an end and rates are headed much higher, you should indeed shift your portfolio to take advantage of a long-term rotation. However, if you believe that the economy remains sluggish…and the trade war is not going to end any time soon…then you should proceed with the thought that this rotation is not something that will last for more than a few weeks.

Tech should face headwinds for many, many months.

Of course, we have not seen a total “rotation” out of safety names and into riskier ones (out of value, into growth)…as the tech group has been stymied by concerns over regulation. Therefore, we can certainly see that the algos can…and are…programmed to look at many different issues. As we said yesterday, we believe that this regulatory issue is a bi-partisan one…and thus it is not going away. Therefore, it should cause problems for the sector for an extended period of time…just like the bi-partisan “drug pricing” issue did four years ago for the biotech/healthcare stocks. We do not believe the impact will be as negative for the tech stocks today…as it did on the biotech/healthcare stocks four years ago…but it should still create an important headwind for the tech sector.

AXP near key support

With the ECB decision coming tomorrow…we’d like to turn our attention to the charts of two different stocks this morning. First is AXP, which bucked the bullish trend in the financials yesterday. After their CEO made cautious comments about their commercial cardholders and said the U.S. economy is weaker than it was last year, the stock fell more than 2%. This has taken the stock back down near the support level we highlighted about two weeks ago. Remember, AXP has already broken below its trend-line from December, so if it falls below $115 (its early June lows) and thus follows the broken trend-line with a key “lower-low,” it will be quite negative for the stock on a technical basis……As always, we cannot get ahead of ourselves. We have to wait to until it breaks below that $115 level in a meaningful way before we raise a red flag on AXP, but there’s no question that its action over the past two months has not been very good. (First chart attached below.)

RTN trying to breakout to the upside.

On the flip side, RTN is testing the upper line of the sideways range it has been in since February. In fact, it has broken slightly above that line. However, since it did the same thing back in July...only to roll back over very quickly…we’re going to have to see a more upside follow-through before we can confirm that a breakout has taken place. However, this is a stock that looks quite good right now…and it strengthens our bullish stance on the defense industry stocks as a whole. If the Federal budget that was passed recently is any guide, it looks like this group still has a lot of upside potential left in it going forward. So if RTN can break more meaningfully above its range, it’s going to be very bullish for the stock on a technical basis. (Second chart attached below.)

We will NEVER forget.

We’ll end by saying that our thoughts and prayers are with those who lost their live 18 years ago today on 9/11…as well as those whose lives have been forever affected by that tragedy (including the greatest heroes of that day…the 1st responders).

Posted to The Maley Report on Sep 11, 2019 — 8:09 AM
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