Next year

It has been an amazing year considering how 2018 ended.  Despite a slowing economy and trade tensions the market kept on pushing higher.  Since the announcement of a phase one trade deal with China selling pressure completely evaporated.  Everybody is content to ride the up move which appears to be driven by the retail investor.  I have not seen a tick accumulation signal since last July.  This is by far the longest period without a signal since the 2009 low.  I think people are waiting until next year to take profits for tax purposes.  It is likely there will be some profit taking at some point early next year.  With the FED continuing QE (even if they say it is not QE it is QE) it probably won't be too deep of a pullback or last too long.  The question is how long will the FED continue the current QE program.  If they stop there could always be a bigger pullback.

The rhetoric this week on CNBC has largely been about how the market can continue this big run next year.  Two times I heard the host make comments about everybody being so positive.  Then they asked their guest what could go wrong.  Each time the answer was the economy could grow fast enough the FED would raise rates.  Given the current situation I would say the odds of that are very low. 

If something does go wrong next year it will be the economy slowing too much.  We are still in a manufacturing slowdown (which started about Oct. 2018) and Boeing has scheduled production cuts in Q1.  That will likely hit the data, but I don't know how much.  Neither the transports nor the R2000 indexes have made a new high yet.  XLF has managed to get above its 2018 high which is a positive.  China has said multiple times they expect their economy will see downside pressure next year.  Europe has stabilized some, but there is no sign yet of upside acceleration.

The rhetoric is almost universally bullish.  This morning I was told there was plenty of precedent for another good year in stocks next year after this strong year.  The market seems to be predicting the global economic slowdown bottomed in Q3 2019.  People are expecting the global economy to pick up from here and hence improve profits.  I am not smart enough to predict whether that will happen or not.  I think the transports still need to confirm the outlook.  They really need to make a new high.  Until that happens we have a similar scenario to 2000.  The transports topped in 1999 while the rest of the market kept on going into 2000.  The yield curve inverted in 1998, but the recession did not hit until 2001.   It is slightly different in that so far the transports topped before the yield curve inversion.  However, the inversion opened the window to a U.S. recession usually within 18-24 months.  Will a recession hold off until at least 2021?  I wish I knew the answer.  If the downturn in the global economy is truly over the transports should end up making a new high.  Until that happens I will keep an eye  on the economic data and see how it progresses. 

I hope everybody had a wonderful Christmas that celebrates that holiday.  I wish everyone a wonderful new year.

Bob

P.S.
The book project is coming along  nicely.  I should be done with the rough draft in a few weeks. 
Once in a while the Lord puts a song in my head when I wake up.  Recently I woke up to "What the world needs now is love sweet love".  I probably have not heard that song in decades, but I could not agree more!  It is impossible to be angry, anxious or hateful and be happy at the same time.  It is very easy to be happy when one is forgiving, grateful, thankful, and helping others.  Each of us can choose the type of attitude we want to have.  Nobody can force you to be unhappy unless you let them.

Update 12/2

This was the first serious down day since way back in the first half of Oct.  I am glad I was not trying to find things to write about during this up move. 

The first bit of news was a story out of China that there would be no phase one deal that does not include the removal of current tariffs.  The next bit of news was poor economic data at 10 AM.  That added considerably to the selling.  Breadth was -71%. 

The futures have been soaring right along.  They found support at the 50 SMA.  This is the first negative DI cross since mid Oct. 

There is a slight negative cross in the red/green count.  That is also the first one since mid Oct.  The red count is still well below 50.

SPX found its low this morning.  There was some selling late in the day, but not enough to make a new low.  It will take more selling then that to turn the market down.  However, this is the first time the bears have had a chance to do anything to this market lately.  We need to watch the next few days to see how this plays out.  The VIX spiked up sharply today as people loaded on the hedges.  It is too soon to tell if this is a start of a VIX spike or not.  The ultimate resolution may depend on whether Trump decides to increase tariffs or not. 

Trump figured out that if he keeps saying China wants to make a deal the market will go up.  Someday that effect might wear off.  It seems to be clear they are not close to an agreement on a phase one deal.  The market has had a short attention span for any negative trade comments up to this point.  However, we are getting closer to the Dec. 15 date which still is scheduled to increase tariffs.  I don't have a clue what is going to happen.  I can see where money managers might want to lighten up a little and take some profits from this rally.  A 5% pullback is not out of the question.  If the tariffs go into affect then probably a much bigger one.  Of course one good positive tweet could send the market to new highs.   Be nimble and be quick or be on the sidelines in the short term.

Bob