Posts

Six Charts That Explain This Market from the Sevens Report

/in , /by

The Sevens Report is everything you need to know about the markets, in your inbox before 7am, in 7 minutes or less. Sign up now and get a free two-week trial.

Below you’ll find six charts, spanning asset classes and economic data.

The charts are divided up into two groups.

Group 1 is comprised of four charts that explain why stocks have rallied so nicely in 2017, and why, in the near term, the trend in markets is still higher.

Group 2 is comprised of two charts that look into the future, and show that despite a bullish set up right now, there are real, serious reasons to be worried about how long this rally can last. Point being, these indicators are telling you not to be complacent!

Group 1: Why Stocks Have Rallied

Chart 1:  Economic Data 

Chart 2:  Earnings Growth  

Earnings and Economic Data – The Unsung Heroes of 2017

We have said since the early summer that an acceleration in economic data and earnings growth have been the unsung heroes of the 2017 rally.

And, as long as both of these factors continue to trend higher, that will underpin a continued rise in U.S. stocks, regardless of noise from Washington, North Korea, Russia, etc.

Chart 3:  S&P 500 

The Trend Is Your Friend

The trend in stocks has been relentlessly higher since early in 2016, and the S&P 500 has held that trend line through multiple tests.

Bottom line, the technical outlook on this market remains powerfully positive.

Chart 4:  Commodities (Oil & Copper)

There are few better indicators of global economic growth than industrial commodities, and two or the most important (oil and copper) have been telling us for months that global growth is accelerating.

And, as long as oil and copper are grinding to new highs, that will be a tailwind not just on U.S. stocks, but on global stocks as well.

Group 2:  Risks to This Rally

While the four charts above explain why stocks have rallied and why the outlook remains, broadly, positive, there are still risks to this rally and this market.

Don’t be fooled into being complacent with risk management, because while trends in U.S. and economic growth, earnings and the stock market are all still higher, there are warning signs looming on the horizon.

Chart 5:  Inflation (Warning Sign #1)

Non-Confirmation: Why Isn’t Inflation Rising?

Inflation remains inexplicably low, considering that we’re near full employment and global economic growth is accelerating.

And, accelerating inflation remains the missing piece of a true “Reflation Rally” that can carry stocks 10%, 15% or even 20% higher over the coming quarters and years.

But, it’s not just about missed opportunity.

The lack of inflation is a big “non-confirmation” signal on this whole 2017 rally, and if we do not see inflation start to rise, and soon, that will be a major warning sign for stocks, because…

Chart 6: The Yield Curve – Will It Invert?

Yield Curve: Sending a Warning Signal? 

If the outlook for stocks is so positive, then why did the yield curve (represented here by the 10’s – 2’s Treasury yield spread) equal 2017 lows on Wednesday?

Simply put, if we’re seeing accelerating economic growth, rising earnings, potential tax cuts and all these other positive market events, the yield curve should be steepening, not flattening.

So, if this 10’s – 2’s spread continues to decline, and turns negative (inverts) then that will be a sign that investors need to begin to exit the stock market, because a serious recession is looming, and the Fed won’t have much ammunition to fight it.

If I was stuck on a desert island (with an internet connection and access to my trading accounts of course) and could only have one indicator to watch to tell me when to reduce exposure in the markets, this 10’s – 2’s spread would be it – and it’s not sending positive signals for 2018!

CPI Preview, October 13, 2017

/in /by

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Looking to today’s CPI report, the preference here is for a slightly “Too Hot” number in headline and core CPI while a worst case scenario for stocks is a soft number, but keep in mind there will be impacts from the Hurricanes so the details in the report will be important.

Bottom line, I’ve said consistently for months that the only way I can see stocks moving materially higher is if they are driven by a reflationary rally. We got a glimpse of that in September, but for the reflation rally to continue, we need more Goldilocks data starting with today’s CPI.

Disconcertingly, if we don’t get that Goldilocks data, then the onus is going to be totally on earnings season to support stocks, and ensure this September rally doesn’t reverse. In that scenario, it’s an awful lot of pressure to put on continued growth in corporate earnings this late in an economic cycle.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

Weekly Market Preview, October 2, 2017

/in /by
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 two-week trial.

Last Week in Review

Economic data was mixed last week from a reflation standpoint, as growth data was a positive surprise while inflation data mildly disappointed. But, importantly, the inflation numbers weren’t enough to cause a reversal of the reflation trade or cause an unwind of the gains.

Inflation data remains the most important data point in the market, and Friday’s Core PCE Price Index was a mild disappointment. The August reading rose 0.1% vs. (E) 0.2%, while year-over-year Core PCE Price Index rose 1.2% vs. (E) 1.3%. That’s still well below the Fed’s 2.0% target, and it does somewhat undermine the strong CPI report—but it’s not the kind of number that would make the Fed think inflation is getting materially worse, and as such it didn’t cause a big move in markets.

Staying with inflation, the data was similarly underwhelming with the flash core EU HICP. It rose just 1.1% vs. (E) 1.2%, again sapping some of the positive momentum from the firm CPI data from earlier in December (Chinese, British, US). But like the soft Core PCE Price Index, it wasn’t a major market mover and it doesn’t undermine the fact that there are “green shoots” of inflation lurking out there, so it didn’t cause a pullback.

Looking at growth data, it was more positive. Durable Goods was the other important report from last week, and it handily beat estimates. New Orders for Non-Defense Capital Good ex-Aircraft rose 0.9% vs. (E) 0.3%, and the July number was revised higher to 1.1% from 0.4%. That number is important, because it implies that we’re seeing an acceleration of business spending and investment—and if that continues it will help create that economic “rising tide” that we need to help push stocks materially higher.

This Week’s Preview

For the remainder of the year, every week is an important one for markets as there will need to be constant reinforcement of virtuous reflation, but this week is more important than most given we get the global ISM PMIs and the US jobs report.

Starting with the latter, it’s jobs week, so we get ADP Wednesday, Claims Thursday, and the government report on Friday. We’ll do our normal Goldilocks preview later this week, but once again the wage number will be the key component of this release, and once again the risks are for a number being “Too Hot” and potentially recalibrating Fed rate hike expectations.

Beyond the jobs report, we get the global manufacturing PMIs (out later this morning for the US) and global composite PMIs (out Wednesday). Given the growing number of global central banks that are already removing accommodation (Fed, Bank of Canada) or are about to remove accommodation (ECB, Bank of England) economic growth data needs to stay firm to avoid a “stagflation” scare. So, Goldilocks numbers from both the manufacturing and composite PMIs this week will be welcomed by stocks.

Finally, turning to central banks, the minutes from the September ECB meeting will be released on Thursday, and investors will be searching for clues as to the severity and pace of the Fed’s taper. The
ECB usually plays things pretty close to the vest, so it’s unlikely we’ll see too much revealed in the minutes (they are going to do that at the October meeting), but the bottom line is any hints of extra hawkishness from the minutes could be a mild headwind on stocks this week. Bottom line, economic data in September helped spur a virtuous reflation rally, and that will need to continue this week if we’re going to see new highs in stocks.

Time is money. Spend more time making money and less time researching markets every day. Subscribe to the 7sReport.com.

Reflation On? Why the Durable Goods Number Was Important, September 28, 2017

/in /by

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Durable Goods
• August Durable Goods rose 1.7% vs. (E) 1.5%.

Takeaway
Wednesday’s Durable Goods report was a surprisingly strong number, and if it’s the start of a trend in the data, then we could finally be seeing an economic reflation.

The reason the Durable Goods number was so strong wasn’t because of the headline (it was a mild beat, but revisions largely offset it), but instead because of the key New Orders for Non-Defense Capital Goods ex-Aircraft (NDCGXA). NDCGXA surged 0.9% vs. (E) 0.3%, and the July number was revised sharply higher to 1.1% from 0.4%, signaling that business spending and investment accelerated during the summer.

That’s a legitimately positive surprise, as business spending and investment have been lackluster so far in 2017.

But if we see that activity pick up (and importantly close the gap between actual data and survey data), then that will help push broad economic growth higher. And if inflation keeps accelerating, then we’ve got a legitimate reflation.

Stocks reacted accordingly to this surprisingly good data, as the market rallied (growth is good) and was led higher by our “reflation basket” of banks (KRE), industrials, smalls caps, and inverse bond ETFs. That carried through to other assets, as bond yields surged on the news to new multi-week highs while the dollar also broke above 93.00.

Bottom line, this was a legitimately positive surprise for markets, and stocks and the dollar/bonds reacted accordingly. However, one number does not make a trend, so we’ll need to see continued acceleration in other data (industrial production) before we can confidently say the gap between very strong, “soft” survey data and actual, hard economic numbers is closing in a bullish way. Still, yesterday’s number was definitely a good start.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

North Korea Update, September 26, 2017

/in /by

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Starting at last week’s UN General Assembly, the war of words between US and North Korean leaders has been steadily escalating, but things got even more serious yesterday for two reasons.

First, the North Korean foreign minister said Trump had “declared war” on North Korea with his tweets.

Second, the same foreign minister said North Korea reserves the right to shoot down US bombers, even if they are not in North Korean airspace.

This is no doubt in retaliation to the US flying bombers very close to North Korea in a recent show of force.

Of the two statements, the later is much more important than the former for this simple reason: The
war of words can escalate, but the event that makes North Korea a bearish game changer for stocks would be the firing (but not necessarily striking) of a missile or rocket at anything US, including planes or Guam.

The North Korean threat to fire a missile at US war planes operating outside of North Korean airspace ups
the ante and creates another opportunity for a potential incident.

From a market standpoint, despite the uptick in tension, and despite yesterday’s mid-day dip, I don’t think the North Korean threat is going to cause a pullback, at least not in its current situation. Taxes (will we get cuts?), rates (will they rise?), inflation (will it gain momentum?), the dollar (will it appreciate?) all are much more important in the near term for stocks than North Korea.

But, that said, clearly this is something that can still move markets and dominate the headlines, so we’ll continue to watch it for you and look for signs of it legitimately becoming a bearish game changer for stocks.

For now, and until North Korea shoots at something US, the situation remains more bluster than bearish (although it still makes me uncomfortable).

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

Is an Economic Reflation Finally Starting, September 15, 2017

/in /by

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Assuming that North Korea is another temporary headwind on stocks (and again it will be temporary as long as they don’t shoot a missile at Guam), then the bigger story of the week is the outperformance of the cyclical sectors and the underperformance of YTD sector outperformers (super-cap internet, utilities, etc.).

I continue to believe that if we are going to see the stock market extend this 2017 rally, it will have to be driven by the expectation of an economic reflation. And, after months of lack luster inflation data, this week provided some hope for that cause. Now, today’s growth data needs to be better than expected to complete the week.

But, even then, one month does not make a trend—so I’m not saying abandon utilities, healthcare and super cap internet for banks and small caps. All I’m saying is that we need to be prepared to make a switch, if we get the compelling signals in the near future.

Regardless, the upcoming economic data (especially the Core PCE Price Index at the end of the month) just got a lot more important.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

New Stock Highs, September 12, 2017

/in /by

The Sevens Report is everything you need to know about the markets in your inbox by 7am, in 7 minutes or less. Start your free two-week trial today and see what a difference the Sevens Report can make.

Stocks surged to a new record high on Monday after the damage from Hurricane Irma wasn’t as bad as feared, and in the absence of North Korea performing an ICBM test over the weekend. The S&P 500 rose 1.08%.

Stocks were higher from the start on Monday thanks to the two aforementioned positive catalysts: Hurricane Irma and North Korea. Both events turned out to be not as bad as feared, and that caused a classic “buyers chasing” rally.

Reflecting the fact that it was those two “not negative” macro catalysts that sent stocks higher on Monday was the fact that the S&P 500 gapped higher at the open and rallied throughout the morning on that buyers chase. Then, stocks spent the afternoon grinding sideways near the day’s highs.

Outside of Irma/North Korea, there weren’t any notable catalysts in the markets Monday. Economic data was non-existent, as was any notable political or geopolitical news (outside of North Korea). Also helping stocks rally was the fact that the week’s important events (CPI, Retail Sales, Industrial Production) are on Thursday and Friday, and there aren’t many looming catalysts on the calendar between now and then.

Stocks maintained their gains into the close to finish the day at a new all-time high.

Time is money. Spend more time making money and less time researching markets every day. Subscribe to the 7sReport.com.

Yellen and Draghi Speech Preview, August 25, 2017

/in /by

The Sevens Report is everything you need to know about the markets in your inbox by 7am, in 7 minutes or less. Start your free two-week trial today and see what a difference the Sevens Report can make.

Both Fed Chair Yellen and ECB President Draghi will speak at the conference today, and while neither is expected to say anything market moving, there are always surprises, so we want to preview their remarks briefly.

Yellen’s Speech: 10:00 A.M. EST

Key question: Will Yellen give us any color on whether we get a rate hike in December?

Likely Answer: (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

What’s Expected: I’d give it about an 80% probability that Yellen does not even mention monetary policy
and instead just speaks broadly about the Fed’s role in helping ensure financial stability.

Wild Card to Watch: If there’s a risk of a surprise here, it’s for a “hawkish” surprise. Yellen could tie in the idea that in order to ensure future financial stability, the Fed needs to continue to remove accommodation and get interest rates back to normal levels.

Again, I think it’s unlikely she’d use this opportunity to discuss policy (unlike Bernanke, she’s never used Jackson Hole as a forum to discuss policy). Still, there is a chance  (20% if my other probability is 80%).

If she does surprise markets, though, look for a textbook (and potentially intense) “hawkish” market response: Dollar and bond yields up (maybe big), stocks down, commodities and gold down.

Draghi Speech: 3:00 P.M. EST

Key Question: Will Draghi forcefully hint at a tapering announcement in September?

Likely Answer: (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

What’s Expected: Nothing specific. Draghi is not expected to speak or reference policy, mainly because the ECB meeting is less than three weeks away.

Wildcard to Watch: Commentary on the euro. While Draghi likely won’t say anything about expected policy, he might comment on the strength in the euro. It’s widely thought that the surging euro (up 10% vs. the dollar this year) would cause the ECB to be “dovish” and potentially delay tapering.

But, Draghi has pushed back on this notion recently, saying that the euro appreciation is the result of a better economy and rising inflation (hence virtuous).

If he reiterates those comments, or downplays the impact of a rising euro, that will be “hawkish” and the euro and German bond yields (and likely US Treasury yields) will rise, while the dollar will fall. This outcome would likely be positive for US stocks (on dollar weakness).

Bottom Line
In all likelihood, Jackson Hole should be a non-event, as it’s simply too close to the September ECB Meeting (Sept. 7) or the September Fed meeting (Sept. 20).

Time is money. Spend more time making money and less time researching markets every day. Subscribe to the 7sReport.com.

Brick and Mortar Retail Update, August 16, 2017

/in /by

The Sevens Report is everything you need to know about the markets in your inbox by 7am, in 7 minutes or less. Start your free two-week trial today and see what a difference the Sevens Report can make.

From a single-stock standpoint, retail was again a quasi-disaster thanks to earnings (the strong retail sales number is more positive for credit card companies like V, LC and AXP than it is the retailers). Now, you would think at some point this year expectations for retailer results would get so low and the outlook so pessimistic that we’d start to get post-earnings rallies in retail on “not-as-bad-as-feared” results. Unfortunately, that’s just not happening.

Of the 10 biggest decliners in the S&P 500 Tuesday, six were retailers: Advance Auto Parts (AAP) (down more than 20%!), Coach (COH), Urban Outfitters (URBN), Bed Bath & Beyond (BBBY), Ulta (ULTA) and Foot Locker (FL). Even Home Depot (HD), which posted strong numbers and raised guidance, couldn’t overcome the negativity. After an initial rally, HD fell 2.65%.

The contrarian in me is all over retail, as I’ve seldom seen a sector where there’s more pervasive negativity. However, I also remind myself that whale oil was once a contrarian opportunity… and we saw how that turned out.

I’m being a bit silly, as brick-and-mortar retailers aren’t whale oil, but the point is that these names simply aren’t cheap enough, and the outlooks aren’t negative enough—which is a scary thought from an industry standpoint. The contrarian in me will continue to watch the space, but for now, I see nothing to do.

Time is money. Spend more time making money and less time researching markets every day. Subscribe to the 7sReport.com.

North Korea Update, August 10, 2017

/in /by

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 two-week trial.

Stocks are down again this morning on this topic, and the reason is because North Korea said it will shoot a missile within “30 or 40” miles of Guam in mid-August. That would be another escalation because it would extend the range of the North Korean missiles—and at that point the US might actually shoot one down. Undoubtedly some of you are getting calls from nervous clients about North Korea, and while I don’t view this as a major market issue, I do want to briefly cover the situation so you can handle any client calls.

Ignoring the rhetoric and bluster on both sides for a moment, two important things happened with regards to North Korea this week.

First, in what was a major positive, the UN passed very harsh sanctions on North Korea with a unanimous vote. That unanimous vote part is key, because both China and Russia supported the sanctions, implying the international community is finally on the same page regarding North Korea’s nuclear program.

Second, in what was a negative that resulted in the recent escalation of tensions, North Korea has apparently learned how to miniaturize a nuclear warhead and place it on an intercontinental ballistic missile. If true, that means they could theoretically strike Japan with a nuclear missile.

Those two events, one positive, one negative, are why this situation has escalated so quickly.

Going forward, despite the escalation in rhetoric, the net events of the past weeks need to be viewed as a positive. If China and Russia stay on board, then the chances of resolution (peaceful resolution) go up significantly. So while things seem bad now, in reality, the chances of a lasting solution have gone up since this time last week.

However, if you have clients who are worried about this and want to hedge up a bit, basically the “North Korea Defensive Playbook” would be as follows: 1) Buy Treasuries (belly and longer dated, so IEF or TLT), 2) Buy defense stocks (TRN, LLL, LMT, NOC ) and 3) Buy the yen via FXY and sell Japanese stocks (i.e. DXJ or EWJ). Now, to be clear, I don’t think you should do this now, but this is the playbook if any clients are asking what to do in case of a conflict.

Time is money. Spend more time making money and less time researching markets every day.