This Week's Message: Last Week's Medley and the Short-term Character of the Stock Market

I knew I was active herein last week, but (just counted), geeze!, 15 posts... yeah, that's a bit much. But, you know, it was a crazy week and it's tough to stay quiet when I know that the media is killing itself to grab the attention of our clients with all manner of noise and, often, hyperbole.

Anyways, I can tell from the week's blog hits (lack thereof) that, despite the hoopla, our clients must be feeling relatively sanguine. Or, perhaps I'm beating the proverbial dead horse, and our readers have more pressing things to tend to. Which, frankly, is ideal, as, trust me, paying attention to every headline and moment-by-moment development does the individual investor little, if any, good whatsoever -- if not the opposite. As for us, well, in a sense, our clients pay us to do precisely that -- in an unemotional, thoughtful, experienced, non-reactive manner, that is.

So, being that there's a huge chance that you missed much of what we said last week, and we think some of it was worth saying, here are a few snips from some of those posts that pretty much sum up the present state of market affairs:

Monday:

"....the near-term is rife with headwinds, yet, as long as odds favor continued economic expansion, long-term patient investors should be content to simply wait out the volatility."

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"The market tanked instantly (giving up a 280-point Dow rally) upon this hitting the wires:

"US reportedly planning tariffs on remaining $257 billion in Chinese goods if Trump-Xi talks fail"

The politically popular narrative around the Fed and interest rates hitting the market clearly misses the mark." 

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"Typically bear markets come with recessions, while corrections are normal during expansions. Right now, the data dictate that we view this as a correction in an ongoing bull market. Now, if/when the data begin telling a different story, we'll be assuming a defensive posture."

Tuesday:

"Two things about today's rally in stocks:

1. Portfolio Rebalancing (as we discussed earlier today).

2. This (the first 10 words, that is) -- which is potentially way bigger -- from this morning:

"I think we will make a great deal with China, and it has to be great because they've drained our country," Trump said."

Wednesday:

"I’ve yet to increase our international target weightings (lowered them in 2018), but I’m beginning to warm up to the possibility as we move into next year, but not because of the latest political trends. Those are a net negative."

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 "As you may know, we believe that the Fed -- while causing consternation among politicians and some players in the market -- is on the right track. This morning's release of the Employment Cost Index (ECI) confirms our view."

Thursday:

"This morning's ISM Manufacturing Survey for October was released and it scored a 57.7, comfortably remaining in expansion mode.

Now, what's uncomfortable is that October's reading was a notable 2.1 point decline from September's and, per the report's featured respondents' comments below, manufacturers are hugely (our adjective of the day) uncomfortable with their business prospects given present international trade conditions (currently our hugest macro concern!):"

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" Ultimately, as we stated from the get-go, the market -- which, along with the economy, can't hold up in a protracted trade war scenario -- will provide the ultimate incentive to settle the matter.

"Trump says he and China's Xi exchanged 'long and very good' trade conversation""

Friday:

 "As clients and regular readers know, our assessment of conditions instructs that -- barring a protracted trade war -- the present economic expansion has legs."

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"This one (just released), plus the one we featured earlier this morning, was good for a 530-point plunge in the Dow (from last night's futures trading to this moment):

Dow falls 200 points to low of the day after Kudlow says there's no China trade plan in the works

Well, as I said earlier, the market is responding exactly as it should. And that (unless you're a short-term trader), in the grander scheme of things, is a really good thing!" 

Moving on:

Each week, along with an exhaustive macro analysis, I perform a completely subjective analysis of what I'll call immediate-term trading conditions. This gives me a feel for what the group think was at the close of the previous week. 

You may recall the brief video analysis I did for you back on 10/16; at the time the market was bouncing nicely after what felt like a huge several-day plummet. I shared, based on my view of the volume setup, my skepticism, and stated that odds strongly favored a test of the 10/11 low, at a minimum. 

Here's the Dow chart I used in the video:   click to enlarge...



Here's a look at my immediate-term assessment of trading conditions the day before I shot that video:

click to enlarge...


And here's that same Dow chart, updated to last Friday. Note the arrows pointing to the times this year when the on-balance-volume line looked similar to last Friday's; those signaled legit bottoms at the time:



Here's my present immediate-term assessment of trading conditions:



Well, yes, things, in the immediate-term, are looking up. Or, you might say, crowd behavior among traders has turned notably positive, compared to two weeks ago.

So, are we off to the races? Well, hold your horses! Notwithstanding the legitimate reasons for optimism just illustrated, the obvious headwinds; mid-terms next Tuesday, trade negotiations, and so on, remain. Plus, the technicals still aren't quite there: 

Sparing you additional charts, I'll simply state that while on-balance-volume looks encouraging, total volume somewhat pales compared to other bottoms this year, and historically in general. Also, among other technical things, the cyclical sectors across the board have yet to even recapture their 50-day moving averages. In a nutshell, the current correction has done some real technical damage that the market has yet to repair. In other words, the potholes on the road to new all-time highs have yet to be filled.

In closing: While general conditions tell us that the economy is in decent shape, which should have patient investors standing pat, the month of November (mid-terms and Trump/Xi meetings at the G20 Summit) will likely have traders jumping out of their skins.

Have a nice week!