This famous Beatles song is reflecting the mood of the market at this time. Even though it has been a wild ride in the last 12 months as we have been battered by tariff news and bipolar moves by the Federal Reserve, the market is showing some positive strength, as we maneuver through the Q3 earnings season, which has not been that bad. We have stated that a “de-escalation” of the tariff battle with China would ease some volatility, and it has. As Chart A shows us below, the VIX is trading in the 13% range and it fell as the possible “phase deals” with China were announced. Remember, this indicator goes down as the market spikes and vice versa.
CHART A
Volatility Index (VIX- six months as of 10/29/2019)
Source: AETOLIA CAPITAL
This week is important as we have seen some of the bigger tech companies report earnings, like Apple, Facebook, and Google. Google did miss based on some fines in Europe, but overall the fundamentals looked good. Apple has fought back into the $1 trillion market cap range as they had good earnings, showing strength in the new iPhone 11 sales and increased demand in services. Facebook also had very strong earnings even though they are being closely-watched by regulators as legislators try to wrap their heads around their business model.
The market, since the beginning of 2018, has been going through a multi-cycle phase that keeps recurring. We see, as the market reaches new highs, it gets overvalued, and then pulls back. Other reasons were either the tariffs or Fed movements or comments. When it falls it will make several attempts to retest the lower level and then head upward. We have seen this on multiple occasions as the chart below shows. The only misstep was in October (2018) through December where the Fed became very aggressive in its stance and hiked rates. This caused a lot of instability in the market and we eventually sold off 20% in Q4. But now the Fed has become our friend this year as they have cut rates three times this year and have announced a likely pause until year-end unless our economy starts to decelerate further. An important factor to focus in the chart, are the two large orange arrows heading “northeast” on the chart. The upper arrow is showing higher highs as we move along, and we have a sort-of parallel formation where the bottom orange arrow is showing higher lower-end prices. This is what we call a “wedge formation”, and its positive as the highs and lows, are heading higher. The short horizontal red lines that show the “retests of lower prices” basically reflects that the market did not feel as though the price of the S&P 500 should head lower. Remember, there are many algorithms that are programmed to watch these levels which plays a major role in how technical levels play out. Yes, that's a nice chart, but what does it all mean. Well, the wedge formation tells us that the two arrows will meet at a higher point where the market will consider the economic environment and most importantly whether a tariff deal will be accomplished. If we get a deal we should go higher, if we don’t, we will revisit lows again. We feel that we will see a replay of the “retesting of lows” scenario and tread sideways for a while, and then possibly seek to go higher. I understand this might be confusing so please feel free to ask any questions. Technicals, are not the only way to view markets, but we utilize different tools and information to create our strategies. But as we continue to see algorithms get more involved, we can clearly see movements based on multiple technical factors.
CHART E
S&P 500 (SPX) as of 10/29/2019
Source: AETOLIA CAPITAL
We also had a robust economics calendar this week. There was a decent surprise in the quarterly GDP as we hit 1.9% but consensus but was slightly lower. We expect to see 2.0% or below, GDP readings for a while, as the economy decelerates. This does not reflect that a recession is around the corner. There was disappointment in the Chicago PMI (manufacturing index) as it continued to fall. But we think this just reflects the slowing economy. Also, the ISM number, today, was below consensus but an uptick from last month. And of course, the highly-awaited jobs report came in at 128K, which was much stronger than expected. This was surprising as everyone was expecting a weaker number considering the recent decline of 42K jobs in the auto sector. We also got two nice upward revisions of the two previous months, which just validates that our economy is chugging along even with fears of a weakening environment.
We are still at the mercy of the tariff talks. Everyone was expecting a November meeting with Xi and Trump, but the summit in Chile was cancelled today, due to some local protests. We hope Xi and Trump will announce another meeting place soon, as the market needs to see the recent progress to continue moving forward. Any pushback from either country and we will be testing previous lows again in the market.
It will be interesting to see how the market reacts if the Fed actually pauses from further rate cuts this year, which we agree. We don't want the Fed to keep lowering their anti-recession ammunition as the cutting of rates is a major tool. Government yields have stabilized and we got the dreaded yield curve inversion to revert back to a more normal state. We think that the Fed has done a good job this year, reversing some of the damage that they created from the overly-hawkish positioning they took late last year that saw the market sell-off by -20%.
If you have any questions or comments, please contact me.
Regards,
John Anagnos
Managing Principal
Chief Investment Officer
AETOLIA CAPITAL LLC
3828 Kennett Pike
Suite 212
Greenville, DE 19807
Office: 302-543-4446 Fax: 302-510-4166
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