Off to the races

Off to the races.  Stocks raced to new highs after Larry Kudlow, stock whisperer, willed indexes up.  Mixed to bad economic numbers were largely put aside in favor of trade talk optimism.

 
MY TWO CENTS
 
1.  Really, people?  Friday was a session of unbridled optimism, even from the view of a casual observer.  First let’s start with some real data points.  You know the ones that come from reliable sources and usually include say… numbers.  The Empire Manufacturing Index put out by the New York Fed describes business health in the region, though it is closely watched.  That number missed expectations for growth and fell from 4.0 to 2.9.  Monthly Retail Sales rebounded from a -0.3% decline to a +0.3% gain.  However if you remove auto and gasoline sales (which are considered less discretionary), the number was lower than expectations, growing at only +0.1%.  Industrial Production showed continued signs of decay, lower than expectations, for a monthly decline of -0.8%, compared to last month’s decline of -0.3%.  By all measures, that is a weak set of data which should raise some concern for stock bulls, but they were having none of that on Friday, thanks to statements made the night before, and reported here, by Larry Kudlow.  Larry loves to talk and almost always manages to provide an optimistic, market moving, viewpoint.  Not that I am opposed to the power of positivity, especially if it is accurate, but I am concerned about the market’s exuberant reaction.  Markets have inched higher almost daily in November, largely on trade optimism for a phase one deal.  By inching up, I mean new highs almost every other day, despite plenty of weak economic data and earnings growth deceleration.  That shows that the market has fully priced in a trade win… of some sort.  Kudlow’s statement was something to the extent of: we are close but not there and something about good mood music.  Traders responded in a relatively broad based rally.  At these levels investors appear to be setting themselves up for disappointment, throwing some caution to the wind.  That said, WHILE YOU WATCHED FOOTBALL, Mnuchin and Lighthizer had a “constructive” phone call with China’s vice premier.  Constructive seems positive.
 
2.  Flying high.  Traders use a technical indicator called Relative Strength Index to monitor a security’s price strength relative to its past price movement. It is constructed as an oscillator, which means that the index moves between 0 and 100.  The calculation for the RSI, as it is commonly referred to, compares the magnitude of recent moves to the average magnitude of moves in the past.  If the number is greater than 50, the stock’s moves are increasing more quickly than in the past, and vice versa for readings below 50.  If the indicator is below 30, a stock would be considered oversold and many traders use that as a signal to buy.  If a stock or an index has an RSI above 70, it is considered overbought and many traders look to lighten up on positions or even speculate on a downward move.  Applying the RSI to the S&P500 shows it above the overbought mark at 74.1 after Friday’s close.  While there is no way to accurately time the stock market, signals like these are typically factored in by conservative investors, who may wait until the strength cools off a bit before entering the market.
 
THE MARKETS
 
Stocks catapulted to fresh highs on Friday on positive comments made by Administration officials.  The S&P500 climbed by +0.77%, the Dow Jones Industrial Average traded up by +0.8%, the Russell 2000 advanced by +0.48%, and the NASDAQ Composite Index jumped by +0.73%.  The S&P, Dow, and NASDAQ all logged new all-time highs.  Bonds pulled back slightly and 10-year treasury yields climbed by +2 basis points to 1.83%.
 
WHAT’S NXT
 
– The National Association of Home Builders Housing Market Index is expected to come in at 71, same as last month.
– Cleveland Fed President Loretta Mester will speak today.
– The week ahead will feature lots of retailer earnings.  On the economic front, we will get some more housing numbers, some regional Fed surveys, the Conference Board’s Leading Economic Index, Markit Services and Manufacturing PMI’s, and the University of Michigan Sentiment indicator.  A big one to watch for will be the release of the FOMC Meeting Minutes on Wednesday.  Please refer to the attached weekly economic and earnings calendars for more details.

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