Even though the S&P closed the day pretty much unchanged yesterday, it was still a wild day in the stock market yesterday. Despite that benign move in the S&P 500, the DJIA rallied almost 1% and the Russell rose 1.8%...while the Nasdaq declined 1.4%. We also saw some big move in other markets...as the price of oil rallied over 5% (and it’s up another 2.5% as we write)....and long-term yields continued to rise (with a move up to 0.97% on the U.S. 10yr note). In other words, there is still a lot going on right now in the market place even as we’ve moved past the election.
The above-mentioned moved in the bond market helped the KBE bank ETF rally another 1.4%. That means that the bank group has rallied a whopping 21% over just the past two weeks...and almost 40% over the past 6-7 weeks!!!! In other words, at least part of the “rotation” into “value” that everybody has been talking about recently has actually been going on for almost two months!
Having said this, many of the other “value” plays have not been outperforming as long as the bank stocks have, so we need to be very careful about projecting the recent “rotation” too far into the future. It’s human nature to make those kind of projections, but it can be very dangerous when we make those kinds of projections after such a short period of time......What we’re trying to say is that we’re more confident about a future rally in the bank stocks...due to what seems to be a change in trend for long-term rates and the yield curve...than we are for some of the other “value” names.
We’re not trying to say that areas like the small-cap sector cannot continue to outperform. We’re just saying that we’d like to see the kind of breakouts in those sectors that we’ve already seen in the financials before we get too excited about their longer-term prospects. One of the reasons we’re highlighting the small-caps this morning is because the Russell 2000 is getting overbought...at the same time it is testing its 2018 all-time highs. Since it is getting overbought at this key resistance level, it could/should have to pull-back a little bit over the short-term...and work-off this overbought condition...before it breaks to new highs in a significant way. If that pull-back or “breather” turns into a substantial decline...which would mean that the recent rally was a “failed rally”...that will be quite negative. So we need to be a little careful about the small caps right here.
The above-mentioned bearish scenario is not our base case. Our base case is that the Russell will probably see a pull-back soon, but we’re still looking for a year-end rally in the entire market...including the Russell before long. Therefore, we’re not trying to portray this as a dangerous situation. We’re just saying that we’re going to have to see a more compelling breakout in the Russell (Iike we’ve already seen in the KBE) to confirm the move. (In fact, it will actually be more bullish if the group works off its overbought condition before it sees a meaningful breakout. Working off this condition will actually give it more upside potential into the end of the year...than it will get if it rallies straight up from current levels.) Therefore, the Russell stands at a key technical juncture...and thus how it acts over the next week or two is going to be very important. (First chart below.)
Speaking of key junctures...and speaking of “rotation”...there are obviously two sides to this story. On the other side of the ledger, AMZN is close to testing a key support level right now. As we have highlighted several times over the past few weeks, the $3,000 level is a very important support level for this stock. It used to be the “neck-line of an “H&S” pattern. That 3,000 level is still a “neck-line,” but now it’s one for a “double H&S” pattern. Either way, any significant break below $3,000 will be very bearish for AMZN.
AMZN is trading higher this morning, so it certainly might be able to continue to hold this all-important support level once again. However, it’s something we’ll be watching very closely over the coming days. If, (repeat, IF) it breaks that level in a significant way, it will leave it vulnerable to a drop all the way down to 2,600 in our opinion. (That is the 50% retracement level of the March-September rally.)
Shifting gears quite a bit, we want to move to the world of sports.....We’ve had a good time making fun of several NY teams in recent weeks/months...but after the Patriots almost lost to the Jets on Monday, we think it is a good idea if we stopped doing that going forward. (It might be a long time before the Red Sox or Pats even make the playoffs...much less win a championship.) However, that will not keep us from making comments from the sports world from time to time. In fact, we usually come out with our predictions for The Masters golf tournament on the Wednesday before the tournament. It usually includes our thoughts about many, many different golfers...and their chances of winning the tournament this year. I also includes some obnoxious (but fun) comments about people in the world of politics and entertainment (and even some other sports from time to time).
However, given how hectic the markets have been recently...and how volatile they remain...we’re going to abstain from that usual long list of predictions this time around. Instead, we’ll just mention a few people and give our ultimate prediction on who we think will win. (When we started doing this two decades ago, we were spot-on several time. However, we haven’t been right in 15 years...but here we go again anyway.)
The big favorite, Bryson DeChambeau, has never finished in the top 20 in the Masters, so he won’t win. Rory McElroy can putt anymore, so he won’t win either. They say Jon Rahm is too impatient to win at Augusta, but don’t count him out. Dustin Johnson should probably be our pick. He’s playing well and has played will there in recent years in this tournament. However, we think the person with the best chance is Justin Thomas. He’s playing well and he has ice water in his veins. HOWEVER, we’re actually not going to pick him. We’re going to pick Tony Finau. His creativity reminds us of Seve Ballesteros, Angel Cabrera, and Bubba Watson (all Masters Champions)......................Tony Finau...you heard it here first!
Finally, we’d like to reiterate what we said in our weekend piece this past weekend: THANK YOU VETERANS!!!!!!!!!
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.