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Morning Commentary

Cautious Rally Nearing Big Test

By Charles Payne, CEO & Principal Analyst
7/11/2018 9:45 AM
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The market opened in the plus column on Tuesday and gingerly worked higher even as the internals began to shift. The Russell 2000 turned lower after hitting a new all-time intraday high. A lot of high-flying tech names stumbled into the close.

I mentioned Consumer Staples (XLP) on Monday night. It was the best performing sector yesterday, led by PepsiCo (PEP), which posted better-than-expected organic growth in North America.

S&P 500 Index



Consumer Discretionary (XLY)



Consumer Staples (XLP)



Energy (XLE)



Financials (XLF)



Health Care (XLV)



Industrials (XLI)



Materials (XLB)



Real Estate (XLRE)



Technology (XLK)



Utilities (XLU)




Hitting the Bricks

If I had the guts to say

Take this job and shove it

I ain't working here no more

-Johnny Paycheck

The cautionary tone of the market was reinforced after the U.S. Bureau of Labor Statistics (BLS) released its Job Openings and Labor Turnover, also known as the JOLTS report. There was a slight decline in job openings, 6.6 million from 6.7 million, but the headline was that a record number of folks calling it quits.

In May, a total of +212,000 quits climbed to 3.56 million to an all-time record (the data goes back to 2000). This lends more anecdotal evidence that big wage increases are right around the corner.  Remember, these “quits” were featured prominently on Janet Yellen’s economic dashboard. 

I’m not sure how important it is with this Fed, but there is no doubt that a potential spike in wages is scaring the heck out of Wall Street. Nothing is a better harbinger of higher wages than a tsunami of folks telling the boss to “take this job and shove it.”

It was another solid outing as the major equity indices have now staged a four-day rally in the midst of the so-called Trade War.  I will say, the session underscored a persistently frustrating issue for investors.  You still can’t throw darts.

There were barely more winners on the NYSE than decliners and substantially more were lower on NASDAQ than winners.  The good news is that combined, those indexes saw 262 new 52-week highs against only 51 new lows. 

Red Flag

After a nice bounce Monday, the financials looked awful on Tuesday, weighed down by regional banks, but those big money center institutions were also lackluster.

The S&P Financial (XLF) is now down 2.6% for 2018, but off 9.9% from its January 26 high point. That was the day President Trump went to Davos and threw the gauntlet down on the global elite establishment. 

Of course, I think banks in this country have other issues. Small banks are just getting out of the shade of onerous regulations that should have never applied to them. Large banks continue to rely too much on gimmicks and trading desks.

Right now, the XLF (financial etf) is in a descending triangle after making a series of lower highs. It’s going to make a decisive break, either reversing the trend or collapsing beneath key support.

That move probably begins on Friday when four big financial names report their quarterly financials. The following names are down year-to-date:

Financials are expected to see revenues up 4.5%, and earnings up more than 22.0%

Big Hopes for Big Earnings

After a monster earnings period for the first quarter, the Street is looking for lightning to strike again.

2018 Earnings Bonanza?

1Q 2018

2Q 2018




Earnings Per Share




With just three days to go until earnings season kicks off, I’m excited there have been so few earnings warnings. That is a great sign, although the key to breaking the market out to new highs for all the major indices will be strong forward guidance.

If you want a quick lesson on holding high-flyers over even chasing them, I’ll share a secret method that anyone can use in my Afternoon Note.

Today’s Session

The market will open lower on the latest update in the trade battle with China.  The already promised $200 billion in additional tariffs were given a time-line last night by the U.S. Trade Representative citing Section 301 of the Trade Act of 1974. 

Section 301(b) of the Trade Act of 1974, as amended (Trade Act) provides that “The Trade Representative shall take all appropriate and feasible action authorized under [Section 301(c)], subject to the specific direction, if any, of the President regarding any such action . . . to obtain the elimination of [the] act, policy, or practice” covered in the investigation. Section 307 of the Trade Act provides that “The Trade Representative may modify or terminate any action, subject to the specific direction, if any, of the President with respect to such action, that is being taken under [Section 301] if . . . such action is being taken under Section 301(b) of this title and is no longer appropriate.”

It should be noted; these tariffs would be 10% and go into effect at the earliest in September. 

When I look at some of the items, my first question is why are we importing this stuff anyway?  For a nation that was always focused on growth, we have cheered the hollowing out of industries, including farming, in return for cheap but inferior products. 

Total additional cost from tariffs imposed and on drawing board is $32.5 billion.  While that's a lot of money, it’s not going to derail the economy and might even keep the Fed at bay.   Moreover, the idea is that we maybe to skip or find alternatives to lots of the items (list if 195 pages long), but China cannot stop eating soybeans, and there isn't spare capacity around the world to feed 1.4 billion people.  




Charles you are so right! Why would anyone buy dog or cat food from a country that doesn't care what they put in it. Dog food from China has killed dogs in the past. And orange juice? Why would anyone buy orange juice from China. Florida bottles the best orange juice in the world and we have the FDA to make sure our products are safe and free of pesticides. I remember several years ago "Made In America" became quite popular and all of us began looking to see where everything we bought was made. It's time to do this again. Sure I like inexpensive stuff just like everyone else BUT I like inexpensive and not "cheap." China now has become the old Japan. Yes I am old enough to remember. Thanks for your great column! I love it!

Roberta Thompson on 7/11/2018 11:36:44 AM
Charles, I've heard you mention stocks and etfs like "amlp" to gain access to energy sector infrastructure. It has about an 8% dividend which sounds good. However, I keep coming back to this same question everytime I look at a stock to buy for it's dividend. Here is the question: Why buy a stock/etf with a good dividend but the stock value itself has tanked over 15% in the 52 week price window. How can that be a winning trade or stock to hold? Doesn't it just negate the dividend value? I'd be interested in anyone's feedback on this question. BTW, my wife and I love your show and we watch you everyday and listen on XM satellite radio when we're on the road.

Scott Gillespie on 7/12/2018 11:24:40 AM

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