WTI Holds Key Trendline Support
WTI futures tested and held a key uptrend line for the third time in 2 weeks yesterday. And while the trendline is supportive of prices, the price action remains bearish and the odds of a break-down are rising.
Last Week and This Week in Economics, March 27, 2017
“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.
For all of 2017, better-than-expected economic data has helped to offset the decreased likelihood of pro-growth policies from Washington, and that continued last week as what little economic data we did receive was generally supportive for stocks.
Looking at Durable Goods, longer-term readers know we ignore the headline and look straight for New Orders for Non-Defense Capital Goods ex-Aircraft (NDCGXA). That is the better measure of business spending, as the headline Durable Goods order is massively skewed by the timing of aircraft orders.
NDCGXA missed estimates in the Feb. report (-0.1% vs. (E) 0.5%), but the January data was revised higher (from -0.4% to 0.1%). So, that largely offsets the miss in February.
The March flash manufacturing PMI was a disappointment, as it missed estimates and hit a surprise six-month low at 53.2 vs. (E) 54.3. But while disappointing, the flash PMI forecasted weakness in February that didn’t appear in other national manufacturing PMIs, and even at 53.2, that’s still a decent absolute number (remember, anything above 50 shows activity accelerating). Point being, that one number doesn’t suggest a loss of momentum.
Looking at other data, February Existing Home Sales slightly missed estimates but February New Home Sales beat estimates. But, with housing it’s helpful to step back from the monthly data and observe the overarching trend, and that trend is stability. All the housing data confirms that so far. Higher mortgage rates are now causing a noticeable slowdown in the housing recovery, and that remains key un-sung support for the economy.
Turning to the Fed, there were multiple speakers last week, but the headliner was Fed Chair Yellen, who made no comments about the economy or policy during her speech. Other Fed members were on balance slightly hawkish, as many of them referenced hiking three or four times this year, but none of it was impactful enough to reverse the dollar or Treasury yield decline we’ve seen since the Fed’s dovish hike in March. Markets still have a June rate hike at about a 50/50 proposition, unchanged from last week.
Bottom line, all the focus was on politics last week, but economic data remains the unsung hero of 2017, and it continues to help offset growing policy headwinds via Washington.
This Week
This week will be another relatively quiet week from an economic standpoint, and once again the most important number won’t come until Friday.
That number is the Core PCE Price Index contained in the Personal Income and Outlays report. That’s important because it’s the Fed’s preferred measure of inflation, and if the headline PCE Price Index breaks through 2.0% yoy (last 1.9%), and the Core PCE Price Index moves further towards 2.0% (last 1.7%), that may elicit a slightly hawkish reaction in markets.
Internationally, there are two notable reports to watch. First, Chinese Manufacturing PMI hits Thursday night, and while China remains on the back burner from a macro standpoint, any signs of economic slowing will surprise markets. Second, EMU Flash HICP (their CPI) comes Friday. The best outcome for European stocks is a Goldilocks number, where core inflation doesn’t rise much from the current 0.9% yoy pace, and as such doesn’t make the ECB think about ending QE prematurely. A Goldilocks number will be positive for European ETFs (HEDJ, VGK, EZU).
Bottom line, this will be another quiet week from a data standpoint, but the numbers need to confirm the acceleration of growth to continue to support stocks. From a risk standpoint, too-strong HICP or Core PCE numbers are the events to watch (they might make the Fed and ECB lean more hawkish).
Politically, there will be a lot of analysis on the shift towards tax cuts (we’ll do a primer this week), but nothing truly important is scheduled. Finally, on the international front, British PM May will formally trigger Article 50 to begin the Brexit process (although that shouldn’t cause much volatility).
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Tom Essaye on “The Bell” Podcast with Danielle Dimartino, author of FED UP
Thanks to Adam Johnson of BullseyeBrief.com for having me on “The Bell” podcast. This week we talked about oil, the healthcare bill, and the seemingly endless rise of stocks.
We were also joined by author Danielle Dimartino, who told us a little bit about her new book FED UP, which talks about some major flaws she noticed during her nine years working for the Fed. It’s a great read—check it out.
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S&P 500 Price Action Remains Bearish for Now
The S&P has consolidated Tuesday’s selloff over the last two session as focus has been on the Healthcare vote. But technically speaking, price action will remain bearish until futures can reclaim the 2350 resistance area.
Healthcare Vote: Macro and Micro Implications, March 23, 2017
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The healthcare vote in the House later today will have an effect on stocks in the short and long term, regardless of the outcome, so I wanted to run down the various scenarios along with sector winners and losers depending on whether the bill passes or fails.
Healthcare Vote: Macro and Micro Implications
Scenario #1: Bill Passes
Likely Short-Term Market Reaction: Knee-jerk, risk-on rally that likely will see cyclical sectors outperform.
Impact On Other Assets: Dollar up/bonds down/gold down/commodities down (all due to the perceived increased likelihood of tax cuts). Basically, this would be a short-term reignition of the “reflation trade/Trump-on trade” that’s driven markets higher since the election.
Likely Long-Term Market Reaction: Not a bullish game changer. Despite the likely positive reception by the market, this event by itself won’t be a catalyst for the market to move new highs. That’s because even if the healthcare law passes the House, it still has little-to-no chance of passing the Senate, and as such probably won’t become law. So, while it would be an incremental step towards the ultimate goal of corporate tax cuts, it still wouldn’t be material progress. Longer term, this outcome wouldn’t make me add or reduce stock exposure… it would elicit a “wait and see” response.
Effect on the Healthcare Sector and ETFs: This section is for subscribers only. You can sign up for a free trial to access at 7sReport.com.
Next Important Event in this Scenario: Memorial Day. If the bill passes the House, then markets will give the Republicans more of a benefit of the doubt. However, healthcare needs to be done by late April/early May (or Memorial Day at the latest) if corporate tax cuts can be completed in 2017, so the clock will soon be ticking.
Scenario #2: Bill Fails
Likely Short-Term Market Reaction: A resumption of Tuesday’s sell-off. Cyclical sectors led by banks would likely pull markets lower, and a drop down through sup-port at 2300 in the S&P 500 would not be at all surprising by the end of the week. Defensive sectors would out-perform.
Impact On Other Assets: Dollar down (likely big)/bonds up (10 year yield could break down through 2.30%)/gold up (likely big)/commodities up (all due to the perceived reduced likelihood of tax cuts). Basically, this would cause a short-term reversal of the “reflation trade/Trump-on trade” that’s driven markets higher since the election, and we can expect a similar trading pattern to Tuesday.
Effect on the Healthcare Sector: This section is for subscribers only. You can sign up for a free trial to access at 7sReport.com.
Next Important Event in This Scenario: Memorial Day. If the bill fails, the market will hope Republicans pivot and focus on tax cuts, and perma bulls will herald that as a positive. However, make no mistake, a failure of this bill to pass is not a positive for tax cuts, where the fight over border adjustments will make healthcare look tame. Regardless, if there is a pivot to tax cuts, then there needs to be concrete motion on a tax cut bill by Memorial Day, otherwise markets will begin to doubt tax cuts in 2017, which will be a market negative.
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Gold Rally Pauses at Key Resistance
The post-FOMC gold rally met resistance between $1250 and $1255 yesterday as both the dollar and stocks stabilized over the course of the day. Breaking to fresh highs is critical for the 2017 gold rally to remain in tact.
A Potential Warning Sign from Dow Theory, March 22, 2017
An excerpt from today’s Sevens Report (the Sevens Report is everything you need to know about the markets, in your inbox by 7AM in 7 minutes or less).
The price action this week has made us more cautious on this market from a technical standpoint (we’ve been cautiously positive fundamentally for some time). And the reason for the caution has to due with Dow Theory.
The Dow Transports are poised to print a bearish “lower low” on the weekly chart (depending on how things play out through Friday’s close). In a nutshell, the Transports plunged through their most-recent weekly closing low at 9043.90 yesterday. The “lower low” would be the first signal of the four needed to turn our interpretation of Dow Theory bearish.
As a reminder, the last time we published that Dow Theory had turned bearish was in July 2015, just weeks be-fore the Dow Industrials and S&P 500 fell 1000 points and 100 points, respectively, in the opening minutes of trade due to Chinese currency turmoil. While Dow Theory was bearish, stocks fell nearly 15% before recovering after the election and turning back bullish. Our signals did miss out on a modest 3% upside gain (most of which took place in the back half of election week, before the signal was offered).
Bottom line, Dow Theory remains positive for now; however, the Transports did just flash a warn-ing sign. And while we still believe the path of least resistance, based on technicals, is higher for now, we are monitoring the technical situation carefully to keep you informed of another potential period of volatility.
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Dow Transports Flash Warning Sign
After the S&P violated its post-election uptrend Monday, the second bearish technical development of the week occurred yesterday as the Dow Transports made a “lower low” on the weekly chart, the first of four such “prints” needed for Dow Theory to turn bearish.
The Case for Europe, March 21, 2017
The Case for Europe, an excerpt from today’s full Sevens Report. Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free trial.
For the past several weeks, I’ve been consistently mentioning Europe as an attractive tactical investment idea. Today, I wanted to more fully lay out the investment thesis, one that is based on 1) Compelling relative valuation, 2) Continued central bank support (i.e. QE), and 3) Overestimation of political risks.
I believe those three factors have created an attractive medium-term risk/reward opportunity in European stocks, and I believe the region can outperform the US over the coming months, especially if we see policy disappointment from Washington.
Bullish Factor #1: Compelling Relative Valuation.
The reasoning here is simple. The S&P 500 is trading at the top end of historical valuations: 18.25X 2017 EPS, and 17.75X 2018 EPS. There’s not much room for those multiples to go higher, and if we get policy disappointment or the economic data loses momentum, markets could hit a nasty air pocket.
Conversely, the MSCI Europe Index is trading at 15.1X 2017 earnings, and 13.8X 2018 earnings. That’s a 17% and 22% discount to the US. So while it’s true Europe should trade at a lower multiple vs. the US given the still-slow growth and political issues, those discounts are pretty compelling. In a world where most equity indices and sectors are fully valued, Europe offers value.
Bullish Factor #2: Ongoing Central Bank Support.
This one also is pretty simple… the ECB is still doing QE. The ECB is still planning to buy 60 billion euros worth of bonds through December of this year. That will support the economy, help earnings and push inflation higher, all of which are positive for stocks. Now, there is a risk that the ECB could begin to taper its QE program before December, or end it all together in December, but neither risk looms immediately, and the much more likely result is that the ECB tapers QE starting in 2018 and ends the program in June 2018. In that scenario, the outlook for Europe over the coming months remains positive.
Bullish Factor #3: Overblown political risk.
We’ve been talking about this for a while, but the fact is that political risks in Europe are overblown, and just like people underappreciated risks in 2016, I believe they are now overreacting to Brexit and Trump by extrapolating those results too far.
Going forward, there are really two important elections this year: France and Germany. The worry is that far-right candidate Marine Le Pen will win the presidency, but that remains extremely unlikely. The top end of her support looks to be just 25%, which might be enough to win the first round of voting (where voters will cast ballots for no less than 11 candidates). Yet according to all the polling, she badly loses the second round of voting by margins as big as 30% to 70%. Point being, Le Pen is not Brexit, and she’s not Trump.
Second, Germany will have elections in September, and Social Democrat leader Martin Schulz will challenge Merkel for the Prime Minster position. Schultz is a former President of the European Parliament, and he’s not anti EU at all. So, if he wins, from an EU outlook standpoint, it isn’t a negative. Now, I’m not going to get into the details of his politics, because they aren’t yet important for this investment. The bigger point is that it’s not really a problem for the European economy if Schultz wins. Bottom line, we’ve done well in international investments in the past (Japan during Abenomics, Europe when they started QE), and we believe this is another opportunity to outperform.
How to Play It: VGK vs. EZU vs. HEDJ. For subscribers only.
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S&P 500 Violates Trend Support
The S&P 500 is showing signs of fatigue as one version of the post-election uptrend line was violated yesterday. Initial support at 2365 is now the most important support level to watch in the index as a violation would likely mark the beginning of the first pullback in the Trump-Rally