This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.
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The Stock Market Will Continue To Rise As Red Flag’s Blow Away
Just like that the stock market recouped nearly half its loses from last week, with the S&P 500 surging by almost 2.7 percent. Maybe it is me, but did anything materially change from Friday? Did all those Red Flag’s blow away? Did the trade war that everyone feared suddenly evaporate? Did China agree to cave and give us all of our demands? Did the surging Libor mystery finally get solved? Did the Fed stop paring its balance sheet? Did Elon Musk create a time machine that allowed us to bypass 1987, and go straight to 1988? I want to know what change, because from the way I see it, nothing materially changed since Thursday or Friday.
Buying More Semis?
The Chinese have agreed to buy more semiconductors from the US; I’m curious to know just how much more they are planning to buy because I can’t seem to figure that part out. Is it $1 more or the $14 billion that Intel’s market cap went up today? How about they first approve Qualcomm buying NXPI, without Qualcomm having to give more concessions?
So at the end of the day nothing changed, except perception.
Trade War Is BS
It is still my belief the Trade War theory was complete BS. If it was on trade war fears why did the banks get slammed the most? Facebook had plenty of reasons to go lower as well. Then my favorite is the dollar! The dollar went down last week on heightening trade war concerns, but yet trade tensions easied over the weekend, but guess what, the dollar still went down today. Undoubtedly the dollar should have surged on the relief of the trade war tensions. You see a surge higher? I don’t.
Here is a five-day chart of the S&P 500, financials, and technology starting on March 20. Financials had a more prominent jump following the Fed results, and by the way, had the more significant decline. Notice which group is still underperforming as of today’s massive rise? The financials.
Here is another chart, with the materials and industrials, right in the middle of the trade war tensions, which group performed worse? The financials. Which group is still trailing? The financials.
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So why did the banks go down so much? Are they really in the middle of the trade war tensions? Usually, banks go up and down based on interest rates, and spreads, right?
Not As Many Hikes
I still believe that the trade war narrative has been overplayed. The real culprit here are rates, and you can see it in the dot plot that the Fed likes to put out. It is also the reason why the dollar has continued to fall, and the reason why 2-year yields went down after the FOMC. The majority of the plots on the dot plot chart fall between 2 and 2.25 percent. The effective Fed funds rate today for all intensive purposes is 1.7 percent, 2 more hikes equal 50 bps, which takes the rate to 2.2 percent! It means that we likely don’t get four rate hikes in 2018, just three.
When did we start talking about four rates? After the January jobs report, with the hot wage growth, that sparked inflation fears. What was one of the hottest groups in the stock market from February 8 through March 20? Technology, which surged by nearly 10 percent, and the banks which were up almost 6 percent, and what was the worse performing group during that time, well the utilities. Why did the utitlites underperform? Becuase rising rates aren’t good for high yield equities.
What about the dollar, you know it was up from February 2 through March 20 by 1.4 percent, and down 1.5 percent since March 20. Higher inflation means higher rates, suggests a strong dollar, and vice versa.
Why Do Banks Matter
So why did the market go down last week? Because investors realized that they weren’t going to get four rates hikes in 2018, and that sparked the sell-off in the banks, and that is the reason they are still the worst performing sector over the past five days. While JP Morgan, Berkshire, Citigroup, Bank of America, and Well Fargo, have a weighting of 6.4 percent in the SPY ETF.
Why did the market go down last week? Because Facebook had some really crappy news and it took the hottest sector down with it. Why does it matter if Facebook is down? Because it has a 6.5 percent weighting in the XLK, and 5 percent weight in the QQQ’s and 1.73 percent weight in the SPY. Is that reason enough?
How Will I Know If I’m Right?
So how will I know if I’m right, well banks should continue to underperform along with Facebook, while the rest of the market continues to recover.
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