THE WEEKLY TOP 10: The Next Few Weeks Are Critical.
Table of Contents:
1) We’re going to have to rely solely on stimulus for a further rally in stocks after the big run-up.
2) The problem is that nobody really has any idea if stimulus alone will do the trick.
3) Transports....It’s not just the airlines that are declining now.
4) Secretary Mnuchin has done a great job, but he’s more recent comments concern us.
5) The Bank stocks are at a critical juncture on a technical basis.
6) Ditto for the energy ETFs and the individual energy stocks.
7) The tech ETFs (XLK, SMH) are at a critical juncture. (See the trend here?)
8) Should we care about the big increase in retail investor activity? (Yes)
9) Why is Speaker Pelosi’s husband raising millions through stock sales?
10) Add South Korea’s KOSPI to the list of markets at critical junctures.
11) AMZN....Cautious short-term...love it long term.
12) Summary of our current stance.
1) Last week, we received conformation from Chairman Powell...and what other people in-the-know have already been saying...and what the data has been telling us: the economy is not going to bounce-back to its 2019 levels any time soon. It’s going to be a very long process. Therefore, those who are relying on a return to the kind of levels of GDP & earnings growth we saw in 2019 to fuel a further rally are grasping at straws. Instead, they’re going to have to rely on central bank liquidity alone to do the trick...and nobody knows if that’s enough.
2) It’s impossible to know whether Fed liquidity alone can help the market rally further...because we have never had a situation where the market has relied on the Fed’s liquidity alone. Over the past 12 years, their liquidity helped to stabilize the market AND helped the economy pick-up steam. This time, the liquidity won’t help the economy to the same degree, so we’ll be watching the markets themselves for clues at this crucial juncture. Whether the S&P, Nasdaq & Russell break above or below their key support/resistance levels over the coming weeks should give us a lot of answers.
3) One clue that we got last week that the stock market is getting ahead of the economy (even what the economy will look like in 2021) was the action in the Transportation stocks. Every one was focused on the shellacking the airlines took. However, it was the meaningful decline in the railroad and trucking stocks that raised the real concerns. If they fall further, it’s going to confirm our concerns...that although the economy IS bouncing back (strongly) from is shut-down, it’s not bouncing back to 2019 levels any time soon.
4) We believe that Secretary Mnuchin has done a very good job, but two comments he made last week were concerning. First, he said that there would not be another mandated shut-down if another wave of the pandemic hit. We agree, but that doesn’t mean there won’t be some serious self-induced shut-downs...and THOSE would slow growth down once again......Second, he said they’ll be providing more stimulus checks. That’s great, but at some point the fiscal stimulus will HAVE to focus on programs that provide self-sustaining income (from jobs).
5) If we’re wrong...and the market CAN rally further on liquidity alone...the bank stocks should do well. Like the broad indices, the banks are at a KEY technical juncture. They pulled-back from a very overbought conditions last week (Iike we thought they would), so like the broad indices, the banks are now at a key technical juncture. If the bank ETFs (the KBE & KRE) can bounce-back and take out their recent highs, it will be very bullish. However, if they see some meaningful downside follow-through, it’s going to mean this group will continue to underperform (like it has for almost 3 years).
5a) The exact same thing that we just said about the KBE & KRE can be said about the three key bank stocks we highlighted last week...BAC, JPM & COF.
6) As you can tell from our comment above, we believe that if (repeat, IF) the market can rally back towards its all-time highs, it will involve some continued group rotation. Another other group that should do very well if the market bounces strongly is the energy stocks. Their action last week was almost exactly the same as the banks. So if the energy stock ETFs...and the key individual stocks we highlighted last week (CVX, COP & NBL)...can bounce-back and take out their recent highs, it’s going to be VERY bullish. If, however, the see some material downside follow-through, it’s not going to be good at all.
7) Needless to say, the tech group will continue to be vitally important going forward. Like so many other parts of the stock market right now, the XLK and SMH are at key technical junctures. The charts for both of these ETFs are virtually the same as the Nasdaq Composite. Therefore, if they sell-off further after last week’s decline, it will raise the odds that they have formed a “double-top.” If, however, they bounce back and take out those double-top highs in a significant way, it will be very bullish.
8) We heard about a report last week that said the big influx of retail investors was not the reason the stock market had been rallying until last week.....That’s interesting, but it misses the point. The fact that the retail investor is now involved in a major way once again...because they’ve been able to make some easy money...is the real issue. As we learned in 1929, 1973 and 1999...this tends to happen at tops.
9) Whenever insiders sell, we take notice. However some insiders are different than others. One insider who sold a lot off stock recently is Paul Pelosi (Speaker Pelosi’s husband). We’re not saying that Paul Pelosi has done anything wrong. In fact, he seems to have gone out of his way to avoid doing anything illegal or unethical. HOWEVER, when somebody has access to the kind information Speaker Pelosi’s husband has...and he decides to sell millions of dollars of stocks all at once...it does raise questions as to whether he is hearing things about the future of the economy and the stock market that he does not like.
10) Last week we touched on several overseas markets (especially in Europe)...and this weekend we’d like to talk about South Korea’s KOSPI Index. South Korea is a big exporter, so the market & economy tends to be a good indicator for global growth. The KOSPI had become overbought recently and looks to have more downside potential. However, once it has worked-off this overbought condition, it’s next move will be key. In other words, this important global stock market is just like many others...in that it stands at a critical juncture...and how it acts over the next few weeks is going to be very important.
11) Let’s take a look at the charts on AMZN. On a short-term basis, its MACD chart is looking dicey, so we wouldn’t chase the stock up at these levels. However, on a longer-term basis the stock still looks great. In fact, if any short-term decline took the stock down 15% would not take it below any important support levels!....We also believe they’ll be able to take advantage of any commercial real estate problems to open smaller distribution centers...and cut a lot of the costs they encounter over “the last mile.”
12) Summery of our Current Stance.......We learned last week that it is highly unlikely that we’ll get the kind of fundamental growth to help the stock market rally further from current levels......Therefore, we’re in a bit of a conundrum. The economy (and thus earnings) are quite unlikely to rise to the level that is being priced into the market right now any time soon. Therefore, investors have to rely solely on stimulus...and we really don’t know if that is enough to give us a sustainable rally...especially after the market has already rallied in a significant way. With this in mind, we will be looking at the markets themselves for answers. Many stocks, groups and broad indices in the U.S. (and around the world for that matter) stand at crucial technical junctures. Whether they bounce from last week’s decline...or see some meaningful downside follow-though moves...over the next few weeks will be critical for how the markets act over the rest of the year!..............We’ve said it before...and we’ll say it again. Stay nimble my friends!
1) After a 6%-7% decline in the stock market on Thursday (depending on the index you look at), it’s easy for those of us who have been very skeptical about the most recent leg off the rally from the March lows to try to say, “The rally is over!” However one-day does not make a change in trend (even when you add-in the mild declines we saw on a few days just before Thursday’s debacle). That said, there is no question that the stock market is at a CRITICAL JUNCTURE...and how it acts over the next week or two is going to be very important for the market over the rest of the summer (and beyond).
The issue has become whether the this past week’s decline is merely a pull-back (or “breather”) that is simply going to work-off the overbought condition that had built up over during the 40% Q2 rally...or it is something that it telling us that the market had become much too optimistic about the Fed’s ability to create a sustainable rally because they don’t have the ability to solve the economic problems (which are healthcare related) with their stimulus.
The one question that nobody has the answer to right now it the key. Can the Fed’s stimulus...and the fiscal stimulus...can help the markets rally in and by themselves. In other words, does the economy matter any more? We already know that the Fed’s stimulus can help thaw-out a frozen credit market...and we know their stimulus (along with fiscal stimulus) can help build a bridge for both individuals and businesses alike to stay above the fray for a while. However, neither one of these stimuli can solve the problem that is weighing on the economy right now. Unlike the other times over the past 12 years when stimulus solved all the problems...liquidity will not solve the economic problems this time...because it is a healthcare problem, not a financial one. Therefore, we have to try to determine whether the stock market can rally on liquidity alone...and without any significant help from the economy.
This all became evident this past week when Chairman Powell confirmed what we’ve been saying for many, many weeks: It’s going to take a long time before the economy recovers back to the pre-pandemic levels. (Mr. Powell was not alone...a people like the CEO of Honeywell and the CIO of PIMCO said the same thing last week.) Given that the stock market had retraced 80% of the losses since the February highs...and given that the economy is going to take a very long time to recover, it’s safe to say that any further rally in the stock market will not be fueled by underlying growth. In fact, with the consensus still looking for the unemployment rate to remain near the 10% level as we move into 2021, so even the data is telling us that the odds are high that the stock market has already priced-in a lot more growth than we’re likely to see for more than a year.
No, this does NOT mean the economy is not going to continue to rebound!!! There has NEVER been any question that it would rebound significantly from where it stood in March, April & May (when it almost completely shut-down). However, it’s still well below where it stood in 2019...and based on what we hear from those who see the most detailed data available on an up-close basis...it’s not going to reach those 2019 levels any time soon. (It’s not just want these experts are saying either. The data is showing the same thing. Yes, a lot of the data is beating expectations, but NONE of it is indicating that we’ll get back to 2019 levels as quickly as the stock market it telling us right now.
We’d also highlight that the stock market rallied over 30% in 2019...in a year where economic growth was mediocre (less than 2.1%) and earnings growth was ZERO. Therefore, the stock market was already ahead of the underlying fundamentals on January 1st of this year. Therefore, to expect the “re-opening” of the economy (which we’ve already known would create a strong bounce in growth)...to be strong enough to help the stock market rally back to where it stood at the end of last year...you will have to rely on something other than GDP and earnings growth.
2) However, as we said above, it’s impossible to know whether Fed liquidity ALONE (along with some help on the fiscal side of things) can provide the fuel for a further rally. This is NOT like the other instances when the Fed engaged in QE over the past 12 years. In those cases, the liquidity helped stabilize the markets AND it helped the economy grow more quickly. This time around, the Fed’s stimulus will NOT help the economy bounce to the same degree...because the economic problems are healthcare problems.
Maybe the liquidity alone WILL be enough, but we won’t know until the stock market itself tells us. This is why technical analysis is so very important...especially in times like these. Therefore, we’ll be watching the action in three key indices going forward for answers to this critically important question.
The first index will, of course, be the S&P 500 Index. We’ll be watching the “old resistance” level on this key index...as that should provide important “new support.” The 200 DMA (which continues to trade very near the 3,000 level) is the level we’re talking about...and we’ll be watching it like a hawk over the next week or two. If it can hold near that level during this pull-back...and can rally back above the highs of early June over the coming days and weeks, it’s going to be VERY bullish for the stock market on a technical basis. If, however, it breaks below this key moving average in a meaningful way (a slight “break” will not be a problem), it will be quite bearish. (First chart below)
Needless to say, the action in the tech laden Nasdaq will be very important as well. Remember, the S&P made a “double top” in both 2000 and 2007. This time around, it is the Nasdaq that has the potential of making a “double-top. (Yes, it did make a very slight “higher-high” recently, but on a long-term chart, it would definitely still be considered a “double-top”.) So if the Nasdaq rolls over in a significant way soon, it’s going to scare a lot of investors.....On the flip side however, if the Nasdaq can bounce back after only a mild decline...and can break above that “double-top” high in the weeks ahead, it is going to be very, very bullish. Therefore, even though we’ve already talked about a couple of “key junctures” in the stock market this year, this one is easily as important as those others...and more important than most of them. (Only the one in late March...at the lows...was more important.)
Finally, we’ll also be watching the Russell 2000 Index. This small-cap index is tied quite closely to the domestic economy (because it gets most/all of its revenues from here in the U.S.), so whether it holds up or breaks down should be very important as well. The chart on the Russell is some-what similar to that of the S&P, but there are definitely some differences as well.
Like the S&P 500 index, the Russell was also able to move above its 200 DMA late last week, but it did not get as “meaningfully” over that line as the SPX did. Therefore, when it rolled-back over it fell below its key moving average in a more material way. Having said this, this failure at the 200 DMA is not a disaster...at least not yet. It’s going to have to fall below it in a more compelling way to cause some problems. That’s why the 50 DMA is also going to be important. That line provided excellent support for the Russell in May on two different occasions, so if (repeat, IF) it breaks below THAT moving average in a significant way, it will raise a red flag in our minds (especially since that kind of drop would also take it well below its trend-line from the March lows).
There is no question in our minds that some technical damage was done to the stock market last week...BUT not enough to raise any major warning flags. SO we’re going to have to see more downside follow-through in the not-too-distant future if last week’s decline is going to cause some powerful problems for the stock market. In other words, the jury still out. A lot of people are already convinced that they know the answer to the question as to whether the market can rally further on Fed liquidity alone. (And there are others who foolishly believe the economy will rebound to a stronger level than we saw in 2019.)......For us, we definitely believe that the fundamentals still matter, but experience has told us that when the stock market reaches a critical technical level, it’s best to let the market itself tell you what you need to know.
3) One area that will be very interesting to watch in terms of what we can really expect in terms of economic growth will be the Transportation stocks. The DJ Transportation Index (TRAN) got hit hard last week (-8%)...and the big decline in the airline stocks got most of the blame (with the XAL airline index falling 20%). However, unlike on many other occasions this year, other parts of the transportation sector had a very negative impact on the TRAN yesterday last week as well. The S&P 500 Railroad index and the DJ/Wilshire Truckers Index both got hit hard pretty hard last week (falling 9% and 6% respectively). Of course, that’s still nowhere near as poorly as the airline stocks, but these to sub-groups had been RALLYING during the previous decline in the airline stocks.
As we stated this week, the railroad stocks had retraced almost 90% of its Q1 losses...and the truckers were trading at an all-time highs! So these two groups (which are more economically sensitive than the airlines) have been very strong since the March lows. Therefore, the fact that they’re starting to see some material weakness could be telling us that the economy is not going to bounce-back as strongly as some of the bulls would have us think.
It’s too early to draw any conclusions from this past week’s performance in the three different sub-groups of the Transportation Index. However, if this weakness in the rails and truckers continues over the coming days and weeks, it’s going to raise a lot of questions about how strong the economic rebound is going to be........We ALL know (and have always known) that the pent-up demand would create a very strong initial rebound. The question is whether it will be strong enough to justify a stock market trading up above 3000 on the S&P 500...especially now that Chairman Powell is saying that the road back to the former growth levels of 2019 is going to be a “long road.”
4) We believe that Secretary Mnuchin has done a very good job as Secretary of the Treasury...and he has artfully avoided getting ensnared into President Trump’s squabbles the way others in the Administration have done. However, there are two items that the Secretary talked about this past week that concerned us a bit. The first one is that he said that there cannot not be another lock-down of the economy if we get a second wave to the coronavirus. We actually agree with him...it would be economic suicide if that happened again. However, just because it is very unlikely that we’ll see another Federally forced lock-down, who’s to say there won’t be ones on a local basis? More importantly, the key word in that last sentence is “forced.” If there is another wave(s) of the pandemic, the odds that a self-enforced (semi) lock-down of the economy by the population is all but certain.That means that even though the economic slow-down would not be as severe as it was in March & April...it will still be compelling...and it will significantly lengthen the time it takes to regain the former levels of growth.
The second item Mr. Mnuchin discussed was the need for further fiscal stimulus. We actually agree with him on this one as well, but we do not like certain parts of it...like the hand-outs that the Federal government wants to extend. Don’t get us wrong, we understand why $600 or $1,200 checks were needed during the worst of the crisis...and why they could be needed again (especially for some people who didn’t qualify the last time around). However, the fiscal stimulus HAS to shift in a SERIOUS manner AWAY from outright handouts...and towards the kind of stimulus that will provide some self-sustaining income for those who need it. In other words, the stimulus has to focus on job creation!!!
Some people believe that the government can just keep providing bridge loans to those who need them...for as long at it takes. Good luck with that (especially after the election).
5) Let’s update the charts on the two groups that we touched-on last weekend as groups that could outperform the market if the broad market rally continued...the bank and energy stocks. In other words, we believe it is important to look at the groups that should do very well if we’re wrong about whether the market can rally further on liquidity alone. If the market CAN rally a lot further without a return to 2019 levels of growth by 2021, we want investors to know which groups should do well in the current environment. One of them is the bank group...and just like the broad market averages, they are at critical technical junctures as well
Both the KBE bank ETF and the KRE regional bank ETF rolled-over hard last week. After Chairman Powell made his cautionary comments about the speed at which the economy will recover, long-term yields tumbled and the yield curve flattened. This caused these two bank ETFs to fall back within the ranges they had been stuck-in for more than two months (as we moved into the month of June). So far, the drops have only taken these ETF back into the very top of those ranges, so they could easily be seen as merely testing their “new support” levels (as the top of those ranges were the “old resistance” levels). Therefore, if these bank ETFs can bounce strongly off their “new support” levels...and rally back above their early June highs, it’s going to be VERY, VERY bullish for these stocks on a technical basis. However, if they drop more deeply back into those ranges, it’s going to prove to be yet another head-fake for the group (in a long line of head fakes over the past three years).
5a) The exact same thing is true for the three stocks we highlighted last weekend, BAC, JPM & COF. After breaking above a key resitatance level on all three stocks, they had all become very overbought and were all testing their 200 DMA’s. Therefore, we said, they were all ripe for pull-backs. Each one of them has pull-back below their old breakout levels, BUT each one has only slightly broken below those levels. Therefoore, they’re all at very important technical junctures. If they bounce-back above their old resistance levels very quickly...and especially if they break above their 200 DMA’s in a meaningful way, it’s going to be VERY, VERY bullish for these names. However, if they roll back over...break below their 50 DMAs (which, like the bank ETFs, will take them below their trend-lines from March), it’s going to be quite bearish for these names.
6) The situation is almost exactly the same for the energy stocks. After either testing their 200 DMAs, the XLE and XOP both fell back slightly below their recent breakout levels (the top end of the sideways ranges they had been in for quite some time). Just like the banks, they had become overbought and thus had also become ripe for a short-term pull-back. (The same is true for the individual stocks we highlighted...CVX, COP & NBL.) Therefore, the situation is exactly the same for them going forward as well. If they can bounce soon and take-out their 200 DMA’s in a significant way, it’s going to be VERY, VERY bullish for the energy sector. If, however, they roll-back over in a compelling manner, the momentum players are going to throw-in the towel on the group once again.
7) We cannot move forward without touching on the tech stocks. We hate to sound repetitive once again, but what is going on with both the XLK technology ETF...and the SMH semiconductor ETF...is exactly like what is going on with the Nasdaq Composite. Even though these two ETF’s do trade in tandem fairly closely, it’s certainly not a perfect correlation...as the chip stocks have outperformed for several months on a couple of occasions over the past two years. However, their charts are still very similar...and they both recently tested their February all-time highs. Therefore, they have the potential of forming an important “double-top” if they roll-over in a substantial way over the coming weeks. THAT would obviously not be good at all! However, if they can bounce-back quickly...and take-out those double-top highs in a material manner, both of these tech ETFs should continue lead the market higher.
8) We’d like to address a comment we heard about a report late in the week...about the individual investor. We did not read the report, but evidently there was one firm who said that their work showed that the influx of the retail customer has not had an impact on the recent rise in the stock market. They pointed out that many of the names that the retail investors have been involved with in recent weeks and months have underperformed.
That’s great, but that’s not the point. The concerns surrounding the big increase in activity from individual investors has nothing to do with whether they’re the ones pushing the market higher or not. Very simply, it’s the fact that the retail investor has become much more involved that is raising concerns...because the retail investor tends to jump into the market in a major way just as a long-term (significant) rally is reaching a top.
That was the case in the late 1920s, in the early 1970s and the late 1990s. Each time, the individual investor stayed on the sidelines for much of a long rally...but after the stock market began to rally in a way that had little to do with fundamentals...they then jumped-in during the blow-off phase in all of those examples. (Yes, they made some very big (easy) profits at first, but they got burned eventually.)
Whether the big jump in retail investor activity is the reason for any blow-off is beside the point. It’s the fact that this group of investors has become so much more aggressive that matter...as it usually signals an important top in the stock market is imminent......Yes, we realize that the lock-down has played a role in this situation this time, so maybe this development is not as concerning this time around. However, whether they’re the ones that are pushing the market up or not is immaterial.
9) We have always said that it is vitally important to take notice when insiders sell stock. More importantly, it’s ALWAYS important to notice when insiders decide to sell their entire company...because it’s usually a major warning signal. We saw that in 1999 when Goldman Sachs went public...in 2006 when Sam Zell sold his real estate company...in 2007 when Blackstone went public...and 2011 when Glencore went public at the top of the commodities market......However, even though the sale of an entire company tends to be the most compelling signal we see it from insiders, it’s still important to note when ANY insider is selling a meaningful amount of stock.
We wonder if this is something we saw in May...when another insider sold a lot of stock. We’re talking about Nancey Pelosi’s husband. No, we are NOT trying to dig up dirt for political reasons. We’re merely stating facts. In May, Paul Pelosi sold somewhere near $5 million worth of stock in Apple, Facebook and Visa. By the standards of other insider selling that we’ve seen in the past, this is not a huge amount of money. Besides, he didn’t sell those shares in January (after his wife must have received some alarming information on the spread of the coronavirus) like some political insiders did. He sold them in May...and all of these stocks have rallied even more since Mr. Pelosi made those sales.
So we’re not saying that Paul Pelosi has done anything wrong. In fact, he seems to have gone out of his way to avoid doing anything illegal or unethical.....If he does indeed have some information that led him to decide to raise some material levels of cash, he certainly seems to have been willing to leave plenty of money on the table in order to make sure he did things by the book. HOWEVER, when somebody has access to the kind information Speaker Pelosi’s husband has...and he decides to sell millions of dollars of stocks all at once...it does raise questions as to whether he is hearing things about the future of the economy and the stock market that he does not like.
10) Last week we spent a lot of time focusing on several overseas markets...concentrating on Europe. This week we’d like to look at South Korea and their KOSPI index. Due to the fact that they are a big export economy, South Korea has been an important economy...and an important stock market...to watch for several decades.
The rally in the KOSPI has been even stronger than the U.S. stock market...with its 50% gain before it rolled over a bit late last week. This had taken the KOSPI up to its trend-line from its early 2018 record highs and within 3% of its January highs. However, this market...like so many around the globe...had become very overbought. In fact, its daily RSI chart had moved above 80, so it was more overbought than most other global markets. It will take more time and probably some more weakness to work-off its overbought condition, but if it can limit any upcoming pull-back...and bounce-back soon (from its 200 DMA perhaps?)...and can rally above its above-mentioned resistance levels, it’s going to be quite bullish for South Korea’s stock market.
Given that South Korea has been a good leading indicator for the global economy in the past, any breakout in this market should have some very bullish implications for the global economy and many other stock markets around the world as well. However, if any near-term decline turns into a significant one, it’s going to raise a serious warning flag.
So as you can see, the key equity groups in the U.S...and the major domestic stock indices...are not the only ones that stand at a critical juncture. As we said last week, these “critical junctures” will not be resolved over the next couple of days, but they could (or eve SHOULD) be resolved over the next few weeks. We HAD been saying that what happens over the next 2-3 weeks should be important for what happens over the rest of the summer. However given last week’s action, we now believe that the global markets are at an even more important inflection point...and how they act to global events over the coming 4-6 weeks should be very important for the rest of the year!
11) Before we move to the summary of our current stance, we’d like to focus on one individual stock...Amazon (AMZN). This is a stock that we have two very different opinions on. In other words, out short-term stance is different than our long-term one......On a short-term basis, there are reasons why some people might love the chart on the stock, but we actually don’t like it at all.
Yes, it broke above its two-month trading range earlier this week and thus made a nice “higher-high” (at an all-time high!). That should be great, right? Well yes, but looking at its MACD chart, we don’t like the action one bit. After breaking-out above that range early last week, the stock dropped more than 6% from its mid-week high...and this has its MACD chart rolling over and close to making a negative cross. If (repeat, IF) it does indeed see a negative cross, it’s going to take place at a much lower level than it did in April...which would indicate that its upside momentum was running out of gas. Therefore, despite its recent breakout move, any weakness next week could give us a signal that the stock was going to a meaningful pull-back over the near-term.
However, after a 58% rally in less than three months, a material pull-back in any stock...even AMZN...would not be a surprise at all. In fact, it would be normal and healthy...especially since both is daily and weekly RSI charts have become overbought as well. Therefore, we are suggesting that long-term investors avoid chasing AMZN over the near-term...and instead look to buy it on weakness.
On a longer-term basis, the stock still looks very good. Not only has it broken out of a short-term sideways range, but earlier this year, AMZN broke out of a larger sideways range that it has been in since early 2019! That’s right, people keep forgetting that AMZN actually underperformed the rest of the stock market for much of 2019! In fact, from mid-March until the end of the year, AMZN was basically unchanged...while the S&P 500 rallied 14% over that same time-frame.
Even though AMZN did not act as well as the S&P in 2019, it has acted MUCH better this year. (Duh.) The SPX made a “lower-low” at the Q1 lows this year...with the March lows pushing almost 5% below the lows of late 2018. However, AMZN made a “higher-low” in March...bottoming at a level that was 25% ABOVE the late 2018 lows! In fact, AMZN did not even fall below its 2019 lows. Instead it held that key support level in March...and then rallied WELL ABOVE it its old highs...to a substantially higher (record) high. This all means that AMZN could see a very meaningful decline...and still remain above any important support levels. It would have to fall more than 15% (below its old highs from February of 2175) before there would be any technical damage on a longer-term basis.
We also like one of the lesser known aspects of AMZN’s story. We do not cover the stock, but we do know some successful commercial real estate investors. They tell us that AMZN has a plan to cut their costs considerably over the coming years. They lose a lot of money over “the last mile” of their deliveries. It costs a lot of money to for them deliver packages “the last mile” to your door (or to pay somebody else to deliver it for them). What they want to do is to start setting up distribution centers in cities and towns all over the country. It will still be very convenient for people to pick up their packages at the local store/location and they still get their packages for free. Yes, people will still be able to get their packages delivered to their homes, but they’ll be charged extra for that convenience.
With small businesses struggling so badly after the coronavirus, we’re sorry to say that this is going to help Amazon pick up a lot of commercial space (in cities and towns alike) at very good prices...as many of these spaces go empty in the future. Therefore, the “last mile” will no longer cost AMZN so much in the future. In fact they might even make a little money on it......Again, we don’t cover the company, so our long-term bullish call is mostly dependent on the technical outlook....but there is no question that AMZN never stands still.
12) Summary of our current stance......We highlighted that the stock market had become very overbought last weekend...and at the beginning of last week we touched-on the move to high levels of bullish sentiment (in the Investors Intelligence poll)...as well as other items ( VERY low put/call ratio) as reasons to think that the stock market had become ripe for a pull-back. In other words, no matter what Chairman Powell said this week and no matter what happened to the “Covid count,” the market was due for a decline. However, the fact that Chairman Powell did throw a big bucket of cold water on the thought that the economy was going to rebound back to its 2019 levels quickly...definitely exacerbated the drop.
There are certainly reasons to think that we could see some more downside follow-through. On the technical side of things, the S&P 500 Index saw an “Island reversal” last week...which is frequently a sign that a strong/sharp rally has become exhausted. Several of the major averages fell back below their recent breakout levels (albeit by a small amount). Also, the level of liquidity that is being pumped into the system has fallen off considerably. I has gone from a rate of over $500bn per month in March...to $275bn in April...to $120bn now. On top of all of this, the Aussi dollar (which is a key component of the “carry trade”) has rolled over in a considerable way from a very overbought condition.
Now that the Fed Chairman has confirmed that a V-Shaped recovery is highly unlikely (something that was echoed by several other people who have access to the a lot of data...like the CEO of the conglomerate, Honeywell and the CIO of PIMCO), it is becoming evident to investors that they do not have the same kind of ECONOMIC backstop they have had over the past 12 years.
When problems have arisen since 2009, the Fed’s liquidity injections have solved both the problems facing the markets and those facing the economy...because both problems were financial in nature. This time, the economic problems are NOT financial in nature...they’re healthcare related. Therefore the Fed’s financial solutions cannot solve the economic problems this time.
Therefore, we’re in a bit of a conundrum. The economy (and thus earnings) are quite unlikely to rise to the level that is being priced into the market right now any time soon. Therefore, investors have to rely solely on stimulus...and we really don’t know if that is enough to give us a sustainable rally...especially after the market has already rallied in a significant way. With this in mind, we will be looking at the markets themselves for answers. Many stocks, groups and broad indices in the U.S. (and around the world for that matter) stand at crucial technical junctures. Whether they bounce from last week’s decline...or see some meaningful downside follow-though...over the next few weeks will be critical for how the markets act over the rest of the year!..............We’ve said it before and we’ll say it again. Stay nimble my friends!
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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