By Pete Biebel, Senior Vice President

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After soaring in the previous week, stocks flew higher again last week.  The major averages all gained between 1 ½% and 2% for the week and they all ended the week at their highest levels since climbing to record highs in July.  The Buzz Lightyear moment came on Thursday morning when news that trade talks with China were scheduled to resume next month made the market believe it could fly.  Stocks rocketed higher that morning and held onto the early gains over the balance of the session.  Nearly all the gain for the week came in the opening minutes on Thursday.

We’ve seen that movie before.  A headline suggesting the possibility of perhaps some chance of the prospect for an attempt at progress in trade talks, maybe, was just the storyline needed to launch the market into the stratosphere.  Participants are all convinced that a quick and peaceful end to the trade war will be a very bullish development.  In any circumstance in which a potentially very bullish news events lies in the foreseeable future, traders are motivated to guess when the actual news might come.  And, the larger the expected reaction to the news, the more important it will be for traders to already be onboard if/when the news hits.

That phenomenon explains the market’s one-way reaction to hints that the good news may come soon.  It also provides a sense of understanding the “buy the rumor, sell the news” (or “sell the rumor, buy the news” in the case of the expectation of a negative market reaction) effect that so often follows expected major news.  Like the instant air-pocket declines and subsequent massive rallies that followed the results of the Brexit vote and the most recent presidential election, the only hope for profiting on the initial reaction to the news was to already be positioned for the reaction.  So, the least glimmer that the expected news is near can produce a one-way market of believers.  In such a circumstance, even the non-believers are not so foolhardy as to try to get in the way.

If the market is stealing scenes from the Toy Story movies, then the role of Sheriff Woody is being play by the Fed.  The Fed just wants to be loved and to make sure the economy is out of harm’s way.  In the event the market realizes that it really can’t fly, the Fed seems likely to step in and soften the fall.  The market’s recovery last week has reduced the odds of a 50-basis point rate cut by the Fed at its meeting next week.  The market now expects, with near 100% certainty, that the Fed will make a 25-basis point cut in its policy announcement on Wednesday, 9/18.

What was most impressive about the market’s Thursday flight was that it launched the averages out of month-long trading ranges.  Last week, I reiterated my belief that clearing the 2950 level on the S&P 500 Index (SPX) would be a very bullish development.  Over the past month, SPX had six highs near 2940, and its 50-day moving average hovered in the mid-2940s.  With Thursday’s moon-shot opening, SPX began the day in the 2960s and never looked back.  It spent most of the remainder of the week orbiting the 2980 level.  SPX ended the week just below 2980 and within about 2% of its all-time high.

In the Toy Story movies, the character Rex is an excitable dinosaur who suffers from an inferiority complex and anxiety that he’s not scary enough.  Recently, that role has been played by the Russell 2000 Index of small-cap stocks (RUT).  RUT has underperformed its large-cap peers for the past several months.  I would have been more of a believer in last week’s launch if RUT had been able to join the party and rally along with SPX last week.  But, RUT’s gain last week was less than half that of any of the major averages, and, where its peers have climbed to a net gain over the past five weeks, RUT is still showing a loss of nearly 2%.  And, while RUT did finally rally back to very near its 200-day moving average, it ended the week about 1% below that level.

The prospect of trade talk progress, along with an easing of tensions in Hong Kong, helped many international equity markets outperform their U.S. counterparts last week for the first time in months.  The China large-cap index led the pack with a gain of nearly 4%.  An index of emerging market stocks was next-best with a gain of more than 3%.

Two sectors that were notably among the worst of last week’s losers were long-term Treasuries and gold, two sectors that were by far the best performers over the previous three months.  The losses were modest, but still stood out in a week when just about everything else posted a gain.  No doubt both markets had been stretched well into over-bought conditions and were overdue for a little timeout.  I have written in recent months that while I believe that gold is not a good full-time portfolio asset, recent action suggests that current conditions could favor some precious metal holdings, at least for as long as the uptrend is intact.  Investors who might be considering taking on some exposure in precious metals directly or in stocks of gold mining companies, could be presented with good opportunities if last week’s retracement in gold continues over the next few weeks.

With SPX ending last week near 2980, it’s well within reach of its all-time closing high near 3025.  That old 2940 – 2950 range should provide at least temporary support, so there’s not much to worry about as long as that level holds.  I suspect that if SPX is able to reach a new high in the coming weeks, it’s likely to be in the 3040 – 3050 range and not much higher.

The market will be watching the PPI and CPI data along with the Retail Sales numbers as they seem to have the most potential to impact the Fed’s actions in the following week.  As has been the case over the past several months, random headlines regarding the trade war with China, when they occur, are likely to be the most significant catalysts for market action.

Date Report Previous Consensus
Tuesday 9/10/2019 NFIB Small Business Optimism Index 104.7 103.5
JOLTS Job Openings 7.348mm  7.311mm
Wednesday 9/11/2019 Producer Price Index-Final Demand, M/M +0.2%  +0.1%
PPI-FD less Food & Energy, M/M -0.1%  +0.2%
Thursday 9/12/2019 Consumer Price Index, M/M +0.3%  +0.1%
CPI less Food & Energy, M/M +0.3%  +0.2%
Jobless Claims 217K  215K
Friday 9/13/2019 Retail Sales, M/M +0.7%  +0.3%
Retail Sales, less Autos & Gas, M/M +0.9%  +0.4%
Import and Export Prices, Imports, M/M +0.2%  -0.4%
Import and Export Prices, Exports, M/M +0.2%  -0.1%
Business Inventories, M/M 0.0%  +0.2%
Consumer Sentiment 89.8  90.7

 

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