Don’t worry be happy!

Don’t worry be happy!  Equity markets rallied yesterday with high hopes that a meeting with low level Chinese trade officials scheduled for next week will end the ongoing trade rift between the US and China.  The markets were so elated at the prospect of a breakthrough with China that the EM contagion question that plagued markets earlier in the week was pushed to the back burner. Of course, Qatar pledging to invest $15 billion in Turkey didn’t escape the animal spirits that pervaded equity trade yesterday.  Yesterday’s move tells us two things: 1) traders are, or have been, worried about the trade war with China, and 2) traders emotions are on the edge and seem to shift frequently since the markets achieved all time highs earlier this year.  To get a better idea of what is behind the past week of trade we can look at the relative performance of sectors.  On chart 1 of my attached chartbook is a bar chart of the trailing week returns of each sector. First, you will note that Emerging Markets was the loser, which is not a surprise.  What may be surprising are the winners: Utilities and Consumer Staples.  Utilities have been strong as they are equity-based bond proxies and have been trading up along with bonds, which have been trading at the higher end of their recent range (see chart 19 in my attached chartbook).  Even more interesting is the leadership by Consumer Staples.  The Consumer Staples sector is considered a defensive investment and are typically tapped into by investors who are expecting trouble on the horizon.  Remember that Consumer Staples contain things that consumers will buy even in a recession.  Examples of staples are food, toilet paper, and (believe it or not) alcohol.  In addition to their ability to weather recessions, consumer staples enjoy price stability due to their low price elasticity.  That is a fancy economic term meaning that even increaes in prices don’t cause consumers to trade them for other similar, but cheaper goods (it is actually an interesting topic for some future geek-out Wednesday).  Ok, so traders have been favoring Consumer Staples over the last week of trade.  Now we can zoom out and examine the last 60 trading days (see chart 2 in my attached chartbook) in order to see if there is a longer term trend emerging and, in fact, there is. Consumer staples is also the winner over the past 60 days indicating that, though markets are holding up with all indices remaining constructive, investors have been turning to more defensive investments.  Another interesting way of looking at this trend is by observing my Growth Relative to Defensive indicator (see chart 16 in my chartbook).  This indicator moves up and to the right when investors are favoring more growth-oriented investments (such as consumer discretionary) over defensive investments (such as Consumer Staples).  The indicator shows a rapid rise from a year ago through May of this year indicating that investors were betting on growth and good times ahead.  Since May, though it bounced around quite a bit, the indicator has traded sideways appearing to level off, indicating that investors were betting on potential trouble ahead.

The S&P500 traded up yesterday but closed in the middle of its session range placing it back in a more favorable position to test its 2848 resistance level (see chart 4 in my attached chartbook). The Dow Jones Industrial Average was the star of the show yesterday closing just below its session high and right below its 25569 Fibonacci resistance line (see chart 6 in my attached chartbook).  The Dow really needed a positive session to shore up the index after several difficult sessions and its failure to follow through on last week’s breakout.  The Dow’s impressive showing yesterday was helped along by Walmart and Boeing, which both posted impressive rallies in response to positive earnings releases.  Both the Russel 2000 and the NASDAQ 100 had positive closes but traded in broad ranges.  The relative weakness of the NASDAQ in yesterday’s trade is consistent with defensive behavior of investors (as mentioned above).  The Elon Musk drama continues in the media, though it should not have any material affects on the market (who knew that he was a fan of Karma – see his NY Times interview for some entertainment).  Musk dominating the news cycle must mean that it is a Friday in August.  But for Leading Indicators and U Michigan Sentiment (expecting +0.4% and 98 respectively) there is little else in the way of stimulus for today’s session and traders will hope to capitalize on leftovers from yesterday’s happiness.

daily chartbook 2018-08-17