Dave Moenning

One-Day Wonder Or The New Trend?

Well, that was interesting. In what can probably best be described as a fast money rotation game (something I like to call “Hedge Fund Follies”)- where traders sold the big-cap tech leaders and continued to buy the beneficiaries of the tax reform and the improving economy themes with both hands – the DJIA posted a triple-digit gain, while the NASDAQ 100 endured a triple-digit loss.

Yep, that’s right fans; the FANG’s had a bad day at the office while the banks and transports soared. Such is life at times in the stock market game. Odd yes, but definitely not unprecedented.

For those keeping score at home, the FANG’s did indeed have a rough outing. Facebook (NYSE: FB) fell 4%, Amazon.com (NASDAQ: AMZN) lost 2.71%, Netflix (NASDAQ: NFLX) dove 5.54%, and Alphabet (NASDAQ: GOOGL) dropped -2.44%.

But the losses weren’t limited to just the FANG’s as the semiconductors, which have been on quite a run since the middle of August, also got hit hard. For example, the Semiconductor Index declined 4.39% yesterday with components such as Micron (NYSE: MU) and Lam Research (NASDAQ: LRCX) suffering losses of 8.7% each and Applied Materials falling (NASDAQ: AMAT) 7.7%.

But before you get into a lather about selling the semis and/or the rest of your big-cap tech and heading for the hills, consider that the Semiconductor Index had soared 26% from mid-August through last Friday. As such, a pullback – yes, even a nasty one – was to be expected.

It is also worth noting that the NDX experiences these bad days at the office on a fairly regular basis. As the chart below illustrates, there have been a handful of ugly – albeit brief – periods on the NDX this year.

NASDAQ 100 – Daily

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The question, of course, is if this time will be different. Maybe its the complacency talking, but my gut reaction is, no. In general, tech is where the growth is and after brief bouts of difficulty, institutional investors have tended to calmly and methodically return to the growth areas – once the fast money folks are done with their hysterics, that is.

However, there does seem to be an argument for the it’s-different-this-time camp. Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, summed up the situation for Bloomberg yesterday by saying, “The large tech companies already have low effective tax rates because they were gaming the system… Any reform would have to close the loopholes, which obviously they’re trying to do, so they don’t benefit.”

On the other side of the aisle though, the banks stand to benefit handsomely from tax reform and the higher interest rates that are expected to follow. Perhaps a graph of what is happening in the banks would be worth more than a few hundred more words on the subject here…

KBW Bank Index – Daily

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There is also the improvement in the economy/inflation angle to consider.

Yesterday, we got an update on Q3 GDP that was better than expected as well as a “Beige Book” report that suggests inflation pressures “have strengthened.”

In trader parlance, this equates to an all-out buy signal for cyclical issues. Now mix in the mood of the consumer (one report showed confidence at a 17-year high) and the e-commerce story continuing to improve and, well, traders are falling all over themselves to buy the transports.

Dow Jones Transportations – Daily

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So there you go. Sell the stuff that loses in tax reform and buy the stuff that benefits. Load up the algos and let ’em fly. The FANGs are out and the banks and transports are in. Well, for now, anyway. It will be interesting to see if either of these new themes run out of steam or get overdone by the fast money folks in the near-term.

For now, my thought is to continue to buy the dips – especially the big, bad, scary dips. So, the primary question here is if yesterday’s big dive in tech will continue for a few days/weeks or turn on a dime. Stay tuned…

Thought For The Day:

If you stop learning, you will forget what you already know. -Proverbs 19:27

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

A Productive Day On Several Fronts

I spent yesterday morning in meetings with the folks at Janus Henderson here in Denver. I’m a big believer in the idea that active fund managers will be worth their weight in gold (or should I say, bitcoin?) in the bond market as rates, global economic growth, and perhaps even inflation, potentially chart new courses in the coming quarters/years. The bottom line here is that London-based portfolio manager John Pattullo runs a strategic income fund with a macro-based theme approach and a strong record. As such, chatting with John and his Denver compatriots in the high yield/multi-asset class space was very productive.

At the mid-morning break, I checked in on the markets and was pleasantly surprised to see a double-digit gain on the S&P 500. When the meetings resumed, we chatted up the likelihood that the Case-Shiller data, the Richmond Fed Manufacturing Index reading, and the best Consumer Confidence numbers in 17 years were all contributing to the stock market’s rise.

As we were preparing to leave for lunch, I saw that stocks had advanced further. I learned that comments from Fed Governor Jerome Powell relating to the course of Fed policy and deregulation during his confirmation hearing to become the next Fed Chairman was the likely culprit for the spike to new highs.

Then, about the time the salads arrived, stocks began to nose-dive, losing about half a percent in fairly short order. After some brief exploration on our phones, we discovered that North Korea had decided to launch a new ballistic missile. A missile whose trajectory could purportedly hit Washington D.C.

Oh, and speaking of Washington, we also learned that the President had called off a meeting with top Dems to talk about averting a government shutdown on December 8th because, in Trump’s words, it didn’t look like a deal was gonna get done. Awesome.

Given that some volatility appeared to be returning to the corner of Broad and Wall, I immediately tuned into the business channels as I climbed into the car for the ride back to my office.

I then discovered that stocks had not only reversed course, but were spiking to new highs in a meaningful fashion. This move appeared to be sponsored by the fact that the Senate Banking Committee had voted to advance the GOP’s tax bill to a full vote in the Senate – a vote that could take place as early as tomorrow.

It turns out that Senator Corker had bargained for some sort of taxation trigger should reality not play out according to plan, which was good enough for him to get on board with a “yes” vote.

So, with the economy continuing to surprise to the upside, the new Fed Chair saying he’ll stay the course, and the potential for a tax bill to happen sooner rather than later, investors hit the buy button early and often yesterday afternoon.

From my seat, the word optimism appears to be the primary driver here. Optimism that the economy can finally break out of its long, post-crisis funk. Optimism that business-cramping regulations will continue to be reduced. And optimism that the Fed won’t make a “policy mistake.”

While I am not sure if yesterday’s action will become the impetus for a new Breadth Thrust Buy Signal (which, if history is any guide, could lead to the bulls remaining in charge of the game for at least another year), the action in the small- and mid-caps does suggest that optimism for the future is being priced into stock prices here.

So, all in all, yesterday was a productive day on several fronts. And here’s hoping that optimism continues to be the watch word going forward.

Finally, this just in… Q3 GDP was revised to 3.3% from 3.0%, which was above the consensus expectation for a reading of 3.2% and the best growth rate for the U.S. in three years. It is also worth noting that GDP has now topped the 3% mark for two consecutive quarters. And with the Q4 data looking good, the economy may be poised to make it three straight quarters of 3% or better growth for the first time since 2004-05.

Thought For The Day:

You can’t live a perfect day without doing something for someone who will never be able to repay you. -John Wooden

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.