On one hand, the action since mid-December would seem to suggest that there isn't much going on in the market. On the other hand, there is an awful lot happening these days. So, this morning I thought I'd run through the keys and what we're watching - in executive summary, bullet-point fashion. Hopefully this will allow us to cover a lot of ground in a short period of time.
- Just about everything else in the market has been trumped by the goings on in D.C. these days
- The latest involves the President's Supreme Court pick
- Yesterday there was talk on pharma pricing
- This follows the uproar relating to the executive order on immigration
- But traders want to know, where's the beef? (As in tax reform)
- Don't miss out on the political shenanigans as Dems boycotting hearings on Trump nominations
- The politics of the Supreme Court pick ought to be telling
Yellen & Co.
- First Fed meeting of 2017 wraps up today
- No action is expected
- Statement will be parsed word by word for clues on next steps
- Traders particularly interested in any mention of Trump actions
- Consensus is for three rate hikes in 2017, but large camp now looking for a fourth
- Fed expectations are always important to stock prices
- After moving higher from September through year-end, U.S. Dollar pulling back so far in 2017
- Word is White House trying to "talk down" the dollar
- Head of White House National Trade Council accused Germany is manipulating currency
- Remember, falling dollar good for trade, commodities, and emerging markets
- On weekly chart USD in range since early 2015 - now approaching middle of range
- Yield on US 10-Year soared from 1.367% last summer to an intraday high of 2.621% on December 15
- Consensus is the spike has ended for now
- Big Picture: Expect sideways action in a gently rising channel
- Inflation could impact expectations
- Recent spike in inflation largely tied to doubling of oil prices, so pace of trend unlikely to continue
- 2.76% appears to be an important long-term line in the sand
- An Apple a day keeps the bears at bay (I.E. AAPL report impressed)
- Facebook and Amazon.com report this week too
- 73% of S&P names have topped profit estimates so far
- Note that expectations are high for EPS as we progress through the year
- It's PMI day...
- China's official gauge of manufacturing activity came in above expectations at 51.3 (recall that readings over 50 indicate expansion, while under 50 indicates contraction)
- China's non-manufacturing (services sector) PMI reported at 54.6
- Euro area PMI rose to 55.2 from 54.9 in December
- Don't forget, the Big Kahuna (the Jobs Report) due out Friday morning
- Anyone but me thoroughly sick of Dow 20K?
- Latest breakout looks to be turning into a fake out
- S&P, DJIA, Midcaps, and Smallcaps all back in recent range after recent 3-day decline
- NASDAQ still in uptrend
- Watch Russell 2K, a break of recent lows could be problematic
- Weekly uptrends not at risk
- Monthly trend is solid
- Two ways to view valuation: on absolute and relative basis
- Absolute valuations are traditional P/E, P/D, P/B etc.
- Relative valuations compare metrics to levels of interest rates
- There can be no argument that absolute valuations are high
- The recent spike in rates has caused some of our relative valuations to move into neutral zone
- Bottom Line: Bulls can't afford a "crisis" with valuations stretched
- As such, this is NOT a low-risk environment
- Investors should play the game accordingly (I.E. It's time to turn down the turbo charger)
- The last couple weekly model reviews (published Monday mornings) have highlighted some concern
- The rise in rates, which is traditionally bad for stocks, has been weighing on some models
- Our External Factors models suggest the wind is no longer at the back of the bulls
- To be clear, this is NOT a reason to head for the hills
- However, this IS a reason to avoid complacency
- Models suggest a dip is possible
- But "buy the dips" remains appropriate strategy
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Trump Administration Policies
2. The State of the U.S. Economy
3. The State of Global Central Bank Policies
4. The State of Bond Yields
Thought For The Day:
Create a life that feels good on the inside, not one that just looks good on the outside...
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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