On this date in 1792, the New York Stock Exchange was formed under the “Buttonwood Agreement”. The original document was signed by 24 stockbrokers under an actual Buttonwood tree at 68 Wall Street. Formerly known as the New York Stock & Exchange Board, the name was shortened to its current form in 1863. The Exchange moved to its current location at 11 Wall Street in 1903. Happy Birthday, NYSE !!
Equity index futures markets are lower this morning. The U.S. dollar is weaker. Gold has found a bid, again. As you might have expected, Treasuries have firmed again. Risk off? This is not a fire sale by any stretch, at least not yet. Interestingly though, this is the first time that markets have noticeably reacted to the turmoil that seems to surround this White House.
The latest? Just in case you vegged out on Netflix (NFLX) last night, the New York Times ran a story describing a memo written by former FBI Director James Comey, where the president supposedly is quoted as saying “I hope you can let this go” in reference to the Bureau’s investigation of former National Security Adviser Michael Flynn. Comey is not the source of the story. Two people claiming to be close to Comey and requesting anonymity are. On top of that, the administration denies the account. An excerpt from last night’s White House statement reads “This is not a truthful or accurate portrayal of the conversation between the president and Mr. Comey.”
The papers will ask today if this is a smoking gun. Politicians will call for an investigation into possible obstructionist behavior by the President. Do I know the answers to these questions? No. Do I believe that this is just the beginning of a long, and winding road that distracts the nation from where it needs to be? Maybe. Do I care? I have cried every time I have ever heard the national anthem since I was a boy. Of course I do. This is where discipline comes in.
As an investor/trader, one must have a mercenary attitude toward politics. In the course of accomplishing my primary mission, I only care if this changes the environment in which I must make decisions. A memo without a timestamp that only comes to light after the author has been fired by the President might not be enough to slow down or halt the president’s economic agenda. This latest news coming just after this week’s news regarding classified information and the controversy that followed the firing of the James Comey adds up to a lot of distraction. In aggregate, this is a lot, whether founded or not.
Like I said, this is the first time that markets have hinted at risk-off behavior in response to increased political risk in Washington. There is no doubt that the Trump trade certainly got the market’s ball rolling between the election and the inauguration. However, year to date, Trump stocks have not outperformed the marketplace in general. Financials have badly underperformed the broader indices year to date, while the materials sector has also mildly trailed the markets. Yields compressed by safety seekers will only further pressure those financial stocks. Earnings growth has been the recent market catalyst, and that season is down to tags’ ends. The S&P 500 has stalled in the same area now for almost three months and has actually scraped along that rough 2400 level for weeks now. Another positive catalyst would be required in the short-term for this level to be taken and held.
This is not a positive catalyst. For the current administration to be put on the defensive nearly every day will eventually drag on the marketplace, will force higher valuations on gold and Treasuries than an otherwise unmolested environment might. Some of the technicals have turned negative, such as an apparently imminent bearish crossover on a six-month snapshot of the MACD (Moving Average Convergence Divergence). Relative strength also indicates a market closer to an “overbought” condition than it is to neutral. Do you take risk off today? Maybe, if you’re overextended on the long side. Remember, Market Recon suggests a 7.5% allocation toward gold. Bet most of you are underexposed there.
Where to Run?
Nearly every publication that I have read over the last week or two has suggested investing globally as an alternative to solely domestically. I myself, have told you that you need exposure to global markets through U.S. multi-nationals. This is why the broader market indices have outperformed the Russell 2000. Everyone you talk to seems to be overweight Europe, especially. Is this wise? It could be. The euro certainly is much stronger relative to the dollar since the election of Emmanuel Macron in France. Has the Europe trade become too popular?
An estimated $6 billion dollars worth of new capital flowed into European equity funds last week. Interesting. Year to date, the Stoxx 600 has already outperformed the S&P 500 (+9.2% vs.+7.2%). Over the last month, the outperformance is more like +4% vs. 2.2%. Seems the crowd, at least partially, was already there. Crowded trade? Probably. Justified? Maybe. Two things stick out in my mind. One, European stocks are still trading at lower valuations than U.S. stocks. Omitting the info tech sector, Europe is trading at 15.6x next year’s earnings, while the S&P 500 is trading at 17.5x. That’s worth something. Maybe U.S. stocks deserve to be trading at a premium. Then again, the ECB would seem to be less of a headwind than the Federal Reserve seems to be. Two, the results of the latest investor survey released by Bank of America Merrill Lynch illustrate that their investors are currently at their third-highest aggregate allocation toward Europe in the history of the survey. A lot of folks are either going to be very right, or very wrong. Am I exposed to Europe? Un poco.
10:30 – Oil Inventories (Weekly): API +882,000, Last Week -5.2 million barrels.
10:30 – Gasoline Stocks (Weekly): API -1.88 million, Last Week -190,000 barrels. Market prices for crude faced some pressure late Tuesday and into this morning after the American Petroleum Institution (API) reported a surprise build last night in their weekly inventory data. The reported drop in gasoline supplies did not appear to impact markets nearly as much. After the mini-run made by crude over the last few days coupled with the recent outperformance of the energy sector, this number will impact markets today. The fact that there is no other macro on the national docket can only increase the focus placed here.
Sarge’s Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2404, 2396, 2387, 2381, 2376, 2367
RUT: 1399, 1392, 1385, 1378, 1367, 1361
Today’s Earnings Highlights (Consensus EPS Expectations)
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