Stocks continue their march off the lows despite the US Government shutdown continuing as well as fears over a global recession. The government shutdown continues in its 3rd week and while most focus on what “might” happen ours continues to the market itself. Volume is not outstanding by any stretch, but it isn’t terrible. The V-shape move off the lows will need a bit of consolidation and with earnings season around the corner odds do not favor a quiet quarter. At the moment, we are certainly overbought in the short-term and with indexes bumping up against their respective 50-day moving averages a pullback of any kind is not out of the question. We will continue to focus on our open risk and obey all of our exits. There is no need to be a hero in this market and it is best to keep a level head.
Perhaps a signal the economy is either headed or in a recession is the yield curve. We did get a slight inversion last year, but it was quickly erased until the end where we saw the curve remain inverted. Two year treasuries are trading above 3 and 5 year at the moment. Let’s be honest, it is only by a few basis points. We are not seeing short-term rates well above any longer term maturities. This is a small inversion and after more than 10 years from our last recession it really should not come as a surprise to see one finally arrive. When you hold rates at 0% for 7 years and raise to 2.5% in just 3 it is bound to cause some issues. Perhaps the FOMC will take a more patient approach in 2019. At the moment, the market is pricing in zero rate hikes for 2019 and in fact rate cut odds rise for the 1/29/2020 meeting.
Sentiment has shifted back to the Bulls camp and it really isn’t a surprise given the huge rise off the December lows. AAII shifted back to the Bulls leading the charge ending the week at 38%. Bears ended the week at 29%. It would not come as a surprise if this market retraced much of the recent move and sentiment resuming its bearish trend.
Quarterly earnings season is set to take off next week. Banks usually are up first and all eyes will be on how an inverted yield curve has treated them. One look at any chart like JPM or BAC and it is easy to see investors have not bet on banks. Given earnings season is around the corner it is imperative you know when your stocks report. You must have a strangle hold on how much risk you are carrying.
We wish you the best and hope you have a tremendous weekend!
