Week In Brief: Week of July 30th

July 24, 2018

Stocks rose ever so slightly last week. As the Dow Jones Industrial Average returned held the 25,000 threshold in its attempt to reclaim the January highs. Not to be outdone, the S&P 500 climbed back above 2,800. Where it currently sits 2.60 percent below January's record high. Having risen 4.3 percent on the year.
The potential U.S.-China trade war continued to heat up. As both sides pressed ahead with tariffs on $34 billion in imported goods. And each threatened of more to come. President Trump warned that he could unleash tariffs on $500 billion worth of Chinese goods if trade terms are not eased.
Yet, stocks continued to see the forest for the trees. As shares climbed on a Goldilocks jobs report. Not too hot. But not too cold. Payrolls came in at 213k vs. an expectation of 195k. Besting the three-month average of 211k. Unemployment rose from 3.8 to 4 percent. As more American workers re-entered the labor force. Wage gains slowed.

Strong hiring trends? Job openings? Workers coming off the bench in search of jobs? Modest wage gains that prevent the Fed from accelerating rate hikes? Manna from stock-market heaven.
While stocks edged toward multi-month highs, the market appeared to be following a path seen during other corrections since 2009, report the astute analysts at SentimenTrader.com. That path includes a 10 percent drop (the February low), followed by a rally, then a test of the low, and then another big rally that resumes the bull market. A pattern that has transpired during the three major pullbacks throughout the nine-year bull market.
Sentimentrader analysts to argue that the closest correlation this bull has to prior market behavior is 2015. Which is like finding alligators in your swimming pool.
As the above chart reveals, should the market continue to follow its 2015 trendline, the S&P 500 will likely peak soon and then head down to test the February lows. Before recovering and then moving sideways for an extended period. Because when the similar pattern occurred in 2015, the lows were broken and the index remained under those lows for 30 days. It then shot higher before flat-lining from July through October of 2016. And only then did it complete a full recovery and move higher following the November election.
In fact, long-time readers will recall what we said at the time: that the stock market was forecasting an upset election for the challenger. As the S&P 500's performance between July 31 and Halloween during presidential election years has accurately forecast the outcome in all but three contests since 1945.
But I digress...
Last week's investor sentiment readings from the American Association of Individual Investors revealed a drop in bullish sentiment into the mid-30s. Down significantly from the near-60 percent reading recorded immediately before January's market correction. Which tells us that investor sentiment remains less than sanguine. Which, from our contrarian perspective, is very positive.
Last week saw crude oil rally. Gold fall. And the dollar trade sideways. Market breadth was powerful. With advancers dynamically outpacing decliners. And share prices continuing to set new highs.
If this represents the anticipated summer swoon? We'll take it. Stocks have traded sideways since mid-January. Yet -- barring a 2015 redux -- stocks currently appear intent on rising. With positive economic data and bullish earnings expectations overwhelming talk of trade wars, political stalemates, etc.
The McClellan Oscillator -- a measure of market-breath momentum -- has turned positive after a number of weeks below zero. Which has historically led to solid medium-term gains, with stock indexes moving higher over the following six months 18 of the previous 20 times. One affirmation of that positive trend was seen in the S&P 500's ability to retake and hold the critical 2,800 level last week. Despite the best efforts of bears. Who desperately tried to push the index down to lower depths.
And as Q2 earnings season gets underway, last week saw resurgent tech-darling Microsoft report sensational quarterly results. Managing to conclude its first-ever $100 billion four-quarter revenue run rate. Despite white noise to the contrary, FANG stocks -- and their tech contemporaries -- continue to lead the bullish brigade. Investors have many ways to ride that bandwagon. And the only losers have, thus far, been those not on it.
Moreover, consumer staples seem to be on the mend. After falling out of bed in February. Then failing to recover, even as the broader market made its way higher. The dislocation between the S&P 500 and the staples index, comprised of long-time stalwarts like P&G, Coca-Cola, Wal-Mart and Phillip Morris, had analysts scratching their heads. But staples have bounced back of late. With some investors believing that these companies present an opportunity. Given their valuations, high dividends and recently-poor-though-recovering performances.
In D.C., Supreme Court Justice Kennedy announced his retirement. Giving the administration the opportunity to appoint a second Supreme Court justice. And set the court's tone for the next decade. Democrats appear poised to fight like cornered racoons. Positing that Trump's new appointment will set the stage to end Roe v. Wade. Which pragmatic, middle-of-the-road types realize is not about to occur.
Kennedy's announcement brought NJ Senator Corey Booker to rail against Trump's pick. Before he was even appointed. Emphatically stating that "This is the time to fight!" The following day Booker appeared at a Jersey political gathering and demanded, "We need to stop the partisan bullsh*t in this country."
Leaving us in a mild state of confusion.
Following meetings with NATO allies last week, Trump met with Vladimir Putin in Helsinki. Headlines were made as Trump called out many in the NATO partnership for not meeting the defense-spending minimums as defined by the alliance. Further, Trump alluded to the idea that many of our allies were willing to allow the U.S. to fund the organization. Even as its biggest European member (Germany) purchases 40 percent of its energy from Russia. Against whom the alliance was originally mandated to stand against.
Some comments were viewed as controversial. But that doesn't mean they aren't true. And for the NATO partnership to evolve and enhance, it must come to terms with some of its glaring inconsistencies. More on this below...
Elsewhere in Europe, the E.U. continued it's assault on U.S. tech firms. Having already levied massive fines against multiple American technology firms, the E.U. hit Google with a record $5 billion anti-trust fine. And more distressingly, ordered Google to restructure the business model of its biggest growth engine -- mobile advertising.
In the Middle East, Israel continued to dole out parcels of the information trove it allegedly heisted earlier this year from a secret facility on the outskirts or Tehran. The released materials point to Iran's continuing attempts to develop a covert nuclear weapons program. And the degrees to which the rogue regime went to conceal the program from the rest of the world. More here.
In the Far East, tensions with China will likely rise. And not only on the trade front. As reports out of North Korea held that denuclearization efforts may falter as the Chinese seek to punish Trump for recent trade demands. Consequently, the U.S. responded by sailing two guided-missile destroyers through the Taiwan Strait for the first time since 2007. Then sending veiled threats to base Marines at the U.S. embassy in Taiwan for the first time.
Modern geopolitics is not for the thin skinned nor faint of heart. But one thing remains certain. China is not accustomed to dealing with a western leader so willing to counteract their slights and aggression.
Weekly Results
Major indices finished mixed last week. The DJIA gained 0.15%. The S&P 500 rose 0.02%. The Nasdaq fell 0.07%. While small cap stocks rose 0.58%. 10-year Treasury bond yields rose 6 basis points to 2.89%. Gold closed at $1,232.00, down 9.45 per ounce, or 0.76%.

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