Hangin’ on. Markets took a break yesterday, eking out some modest gains, as investors digested Monday’s big moves. Interesting news regarding a trade deal was not enough to organize the bulls for a second day.
MY TWO CENTS
- FOMO - Fear Of Missing Out is a real thing and doesn’t necessarily only apply to teenagers missing out on social events, though the abbreviation most likely evolved in the digital social media world. FOMO can be applied to the stock markets as well. Stock momentum is the speed at which a security’s price changes and analysts have noted that stocks with increasing momentum tend to continue their direction. For example if stock is going up at an increasing rate over the past sixty days, there is a good probability that it will continue going up, for a little while at least. In fact, it was one of only a few anomalies that have been empirically proven when it comes to predicting stock direction and is the basis for what is known as momentum trading. Before I go on, I want to mention that it is not as simple as it looks and I don’t recommend jumping into momentum trading. What makes momentum interesting is that it is based on crowd psychology. It works like this: a stock or an index starts to go up and as more and more traders start to notice they too jump in and the increased demand starts to push the price higher at an increasing rate. Once that starts to happen more and more investors start to hear about the move (usually smaller retail investors) and they begin to jump in and increase the pace of the upward move. Of course the key to success is timing as the move doesn’t go on forever and the initial investors (usually the quant traders) get out before the smaller retail investors jump in. I have written a lot about this “most hated rally”. The S&P500 is up roughly +22% year to date and many institutional investors have remained on the sidelines. There are, after all many warning signs, from the economy, a slowdown in earnings, and geopolitical issues. But despite all these, stocks continue to trade up and make new all-time highs and there are good reasons for that as well. Namely, an accommodative Fed, low unemployment, still-low interest rates, and the fact that the US Economy is doing better than most others thus courting investment dollars. All that being said, those institutional investors sitting on the sidelines are probably having some FOMO right about now as we enter the final weeks of the year and they are eager to log solid returns. Assuming that trade talks continue down this most recent positive path and no huge political bombshells hit, institutional investors may start to jump in, adding to recent bullishness.
- D E F E N S E. Somewhat counter to the argument I just made above regarding momentum and bullishness in the stock market, it is interesting to note some of the characteristics of the recent rally to all-time highs. Just by watching the financial news you can’t avoid hearing about Apple, Amazon, Uber, Tesla, Netflix, and so on… you know… the usual suspects. All of these are growth stocks and would broadly be considered tech stocks. They rely on technology and much of their valuations are based on the potential for vast future growth and less so on the quality of their earnings. Few, if any of them actually pay dividends. That makes them highly speculative, but it was this group of stocks that led the stock market charge for most of the recovery since the financial crisis. Beyond the media sizzle there has been a quiet shift in investment preference into what would be considered more defensive stocks. Looking back over the past twelve months we can see that sectors that have typically lagged when growth stocks go up have also logged respectable returns. In fact if you look at the top four performing sectors over the past twelve months you would see that three of them are defensive (see chart 2 in my attached daily chartbook). This shows that investors are diversifying their portfolios to prepare for a potentially weaker economy. Rightly so.
THE MARKETS
Stocks struggled to sustain Monday’s rally yesterday despite positive news from trade talks. The S&P500 slipped by -0.12%, the Dow Jones climbed by +0.11% to a new high, the Russell 2000 advanced by +0.14%, and the NASDAQ Composite rose by +0.02% to a new high. Bonds continued their slip with 10-year treasury yields adding +8 basis points to 1.85%. Crude oil climbed by +1.22% on trade optimism despite OPEC cutting future demand forecasts.
WHAT’S NXT
- Non-Farm Productivity is expected to have grown by +0.9% for the quarter compared to last quarter’s +2.3% growth.
- Chicago Fed President Charles Evans, New York Fed President John Williams, and Philadelphia Fed Head Patrick Harker will speak today.
- This morning Wendy’s, CVS, and The New York Times beat estimates while Humana, Horizon, and Vonage missed. After the bell earnings include Expedia, Square, Trip Advisor, Albemarle, Qualcomm, and Roku.