Stocks Await Results - 4th Straight Decline
Stocks Await Results of the G20 Summit. Saying stocks have declined 4 straight days sounds worse than it is. The market is only down 1.37% from its record high.
A scary aspect for the bulls is the market has peaked at around the same level 4 times now. Yes, the market hit a record high, but it was only slightly above the previous highs.
The market has been range bound since the start of last year. Being in an 18 month range doesn’t sound great if the market is near the high end of that range. Of course, the bears are looking for the end of the cycle. So they think this was a quadruple top rather than a continuation of the range.
This is the set up for the G20 summit which starts on June 28th.
Stocks Await Results - Since the summit is in Japan, we could here some details on Thursday and Friday in America. This isn’t like an economic report. Politics works on its own schedule.
There is no specific time we will figure out if the trade negotiations went well. There will be speculation regardless of what news comes out making it very difficult to trade stocks.
It’s very tough to have an edge in this situation because no one really knows what is being talked about and if either side is willing to give in. If there is a trade deal, it would be a great set up for the market to finally break out to new highs in a significant manner.
Stocks Await Results - Specifics Of Wednesday’s Action
Stocks Await Results - The market opened higher on Wednesday. But it couldn’t hold on to its gains as it closed near the low on the day. From the high to the close, S&P 500 fell 0.62%. It ended up falling 0.12% which is far from a big decline.
These slight declines look worse because they have happened in a streak. Nasdaq actually increased 0.32% and the Russell 2000 fell 0.21%. VIX was in line with the S&P 500 again as it fell 0.43% to 16.21. Even though stocks fell, the CNN fear and greed index was up 4 points to 48 which is neutral.
There was a big spike in treasury yields.
Stocks Await Results - While growth and inflation are weakening, the long treasury trade is overcrowded. So it’s possible yields will rise further.
Specifically, the 10 year bond yield increased 7 basis points to 2.05%. It’s now at 2.06%. The 2 year yield increased 4 basis points to 1.77%. It’s now at 1.79%.
It makes sense that the 2 year yield is rising because the chance of the rate cut on July 31st being 50 basis points fell to 24%. It’s highly unlikely the cut will be 50 basis points. Unless the BLS jobs report next Friday is terrible or President Trump adds new tariffs on Chinese goods because the negotiations didn’t go well.
Best 2 sectors on Wednesday were technology and energy as they increased 1.09% and 1.54%. Oil prices rose over 2% as they neared monthly highs.
Crude oil inventories declined 12.8 million barrels in the week of June 21st as you can see from the chart below. That was almost 5 times the decline expected by the market which was 2.5 million barrels.
That’s the biggest drop since September 2nd, 2016 and the 3rd biggest drop since the EIA started publishing data in December 1994.
Biggest losers were healthcare, real estate, and utilities which fell 1.25%, 1.96%, and 2.15%.
Stocks Await Results - Healthcare sector might take a hit as the Democratic primary heats up. First debates are Wednesday and Thursday night. Latest primary polls from the Economist has Biden at 25, Warren at 19, and Sanders at 15.
These stocks seem to fall when left leaning candidates like Sanders and Warren do well in the polls. Warren has been gaining on Biden in the past few weeks.
Utilities and real estate fell because interest rates rose. Low vol stocks like the utilities recently had the highest percentage of stocks trading above their 150 day moving average since 2013. Investors have crowded into these stocks recently.
Stocks & Bonds Having A Great Year
Stocks Await Results - As you can see from the chart below, it’s relatively rare for both stocks and long term treasury bonds to increase. Since 1980, this is about to be the 10th time stocks and bonds were up at least 5% in the first half.
This action usually doesn’t happen because stocks usually don’t rally into a weakening economy. In the 1980s it made sense because inflation was coming down. It doesn’t fully make sense now. Main reason stocks are up so much this year is because the mini bear market late last year was overkill.
Stocks Await Results - If history is any guide, this situation is good for stocks
In the previous 9 instances stocks increased 8 times in the 2nd half of the year. They were up double digits 6 times. Bond market was up 7 times and had double digit gains just 3 times.
These results are in line with sentiment. Treasury sentiment is euphoric and stock sentiment is neutral. I don’t see stocks rising 10% in the 2nd half of 2019. I’m interested to see if stocks can even rise a few percentage points to solidify the new high made last week.
If there’s a trade deal, the market is more likely to see significant gains in the 2nd half than if more tariffs are added.
Stocks Await Results - Conclusion
News on how the G20 summit is going might come out on Thursday. Japan’s time zone is ahead of America’s. While the Democratic primary debates will move healthcare stocks, I wouldn’t focus on them too much when looking at the overall market.
Investors must deal with the cyclical slowdown and the trade war before even thinking about November 2020. If the economy keeps weakening, 2020 could look like 2016; the economy troughed early in that year.
Once again global central banks are starting to cut rates. There was a global central bank meeting in early 2016 which led to more QE being implemented. That happened to be around when stocks bottomed that year.