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Morning Commentary

Late Spurt & Fresh Start

By Charles Payne, CEO & Principal Analyst
1/2/2019 7:43 AM
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What an amazing spurt into the closing seconds of the last trading day of 2018. Just when it looked like buyers were done for the day, and already in Times Square looking for a place to watch the ball drop, stocks surged in the final four minutes of trading.

 New Year’s Eve Spurt

3:46 PM

4:00 PM

Dow Jones Industrial Average

23,147

23,327

S&P 500

2,489

2,506

NASDAQ Composite

6,595

6,635

Russell 2000

1,342

1,346

 
Small Caps

While all the major Indices were higher, it might have been the Russell 2000 that triggered the spark. The index made its move two minutes before the others, and it was the only index to close at the high of the session.

Keep in mind that last week, the Russell 2000 iShares ETF, saw the greatest inflow of funds, which increased assets under management by 2.27% to $41.0 billion. I’d rather stick to individual stocks; for those looking for small-cap exposure, I think this is going to be a big winner in 2019.

Blue Chips

The Dow Jones Industrial Average rallied almost 200 points in the waning minutes of 2018, led by what was the stock of the day.

I have been highly critical of Goldman Sachs (GS), which was an unmitigated disaster last year. Nonetheless, over the last two weeks, Goldman Sachs has exhibited quiet a resolve that could be a harbinger of a big 2019. The recent move could come from the same bottom fishing that has lifted the Russell 2000. However, I have to say that Goldman Sachs looks like the biggest value stock coming into the New Year.

Broader Market View

It’s easy to say investors are still cautious because Health Care (XLV) was the biggest winner on Monday, but the index was led by biotechnology, which is notorious for booms and busts.

Consumer Discretionary (XLY) was paced by Best Buy (BBY), which has had more lives than an alley cat and a montage of brick-and-mortar names. Even though the expectations are higher after the initial data on holiday shopping, I think investors must have exposure to brick-and-mortar names. However, understand that more than any niche of the market, there are distinct winners and losers.

Industrials (XLI) was led by Deere & Company (DE). Defense contractors also continued to look great. I was wrong about Industrials and Materials (XLB) last year, but the investment proposition hasn’t changed, and the value proposition actually becomes more attractive.

Technology (XLK) was interesting. None of the major names stepped up. Instead, Advanced Micro Devices (AMD) was at the top of the session. I think Technology will be higher in 2019, but it won’t be the best performing sector, nor does it have to be.

Consumer Services slipped as money rotated into other sectors. There are so many compelling names in the space with a lot of baggage or unanswered questions. For that reason, I think these stocks are better for trades or long-term holders. I am not worried about near-term risks and gyrations.

S&P 500 Index

+0.85%

Communication Services (XLC)

+0.15%

Consumer Discretionary (XLY)

+1.07%

Consumer Staples (XLP)

+0.42%

Energy (XLE)

+0.53%

Financials (XLF)

+0.98%

Health Care (XLV)

+1.48%

Industrials (XLI)

+1.00%

Materials (XLB)

+0.84%

Real Estate (XLRE)

+0.19%

Technology (XLK)

+0.94%

Utilities (XLU)

+0.17%

 

Individual Investors No Longer Neutral

For most of 2018, the majority of individual investors were more than likely to be neutral than bullish or bearish. I don’t think that’s the same as being indifferent, but it pointed to conflicts and insecurities that might have been more related to guessing when the longest bull market in history could continue.

In late July, the sentiment shifted to a majority of them being bullish but shifted with the market beginning in October. Interestingly, last week saw a spike in bullishness by more than 6% points, as it coincided with an increase in bearishness, lifting it to the highest level of the year at 50.3%.

Wall Street pros typically point to the individual investor optimism as a proven sell signal, but I don’t entirely agree with them. In fact, the pros miss a lot more than they capture, and perhaps, they spend too much time dissing individuals. However, I should point out that the last time The American Association of Individual Investors (AAII) bearish sentiment got above 50% was April 11, 2014, when the Dow was trading at 14,550. 

It made a pretty good move over the next several years.

That said, I like seeing some investors getting bullish during a market meltdown. 

December 2018 was among the worst month ever. It would be easy for individuals to throw in the towel, take big losses, and head for the nearest bingo parlor. We never know bottoms until long after they’ve been established, and there are millions of would-be investors still waiting for a retest of the March 2009 bottom to get back into the market.

Portfolio Approach

I’m champing at the bit, but understand cash is precious. Still, everyone should be ready to take advantage of the big market swoon because that’s what investors do: buy low and sell high. I’m most concerned with folks that took big hits on tax-loss selling, losing their appetite, or trying to get it all back on a Hail Mary approach to the market.

Don’t stick your head in the sand. 

Communication Services

Consumer Discretionary

Consumer Staples

2

3

1

Energy

Financials

Healthcare

1

1

1

Industrials

Materials

Real Estate

3

4

0

Technology

Utilities

Cash

1

0

3

Today’s Session

Investors woke up to more news of deteriorating economies around the world, including China, which saw manufacturing slip into contraction last month as new orders declined for the third straight month and backlog for the fourth straight month. 

China Caixin Manufacturing PMI 49.7

European manufacturing data was also abysmal and is now on the cusp of contraction as well.

Europe Manufacturing PMI

I love that the market has been tested and shown resolve since Christmas.  It must be tested over and over to establish a base and to shakeout weaker hands.  That said, volatility begets more volatility and more anxiety, so starting off with the Dow down three hundred points brings ever greater psychological pressure.


Comments
The connection between the U.S. markets and China are result of giving away our manufacturing juggernaut to China. It's time to make China pay dearly for the mistakes of weak in the knees U.S. politicians on this issue. If Americans have to pay a couple of extra bucks for socks & underwear with the result being full U.S. employment & higher wages, so be it. Wall Street needs to focus on America First or pay the price for leaving the American Worker for greed money in China. We can have a successful U.S. economy and an average stock market. The Market is throwing a Hissy Fit. The decades long free ride on the backs of America's Middle Class is now in jeopardy. I'm sad for my investments but happy for hard working Americans. I will adjust my portfolio's exposure to reflect these developments.

Don Vito on 1/2/2019 8:54:56 AM
2018 WAS THE WORST YEAR FOR STOCKS IN A LONG LONG TIME
DECEMBER WAS ABYSMAL
I LOVE YOUR BULLISHNESS BUT FACTS DONT LIE
HAPPY NEW YEAR

ERNEST REMUS on 1/2/2019 8:59:27 AM
I'm buying but I don't see any real upside to the stock market for the next six months. It's actually a good time to accumulate if you're a long term investor.

Brian Bigelow on 1/2/2019 9:43:46 AM
Love Don Divito's comment "The connection between the U.S. markets and China are result of giving away our manufacturing juggernaut to China. It's time to make China pay dearly for the mistakes of weak in the knees U.S. politicians on this issue. If Americans have to pay a couple of extra bucks for socks & underwear with the result being full U.S. employment & higher wages, so be it."

POTUS should be credited more uniformly with making average US citizen more aware of how our politicians have sold out so many and how it can be rectified.

Here is one of our many blog from years back on what Wall Street can embrace to win but win by doing the right thing

https://soptime.wordpress.com/2016/11/12/postponed-manufacturing-could-be-key-president-trump-goals/

Jon Kirkegaard
President
DCRA Inc. & DCRA Technologies

jon kirkegaard on 1/2/2019 9:57:52 AM
China's issues are not economic, they are political... Their whole economic model is based on selling cheap in the free market... Unless they stop oppressing the people they will continue becoming more and more useless in the world economy...

Andrew B Newallo on 1/2/2019 12:00:04 PM
Charles, we thank you and wish All a happy new year's. Why has almost no news mentioned that a Top Chinese military general announced to the world" That China should attack USA and sink 2 aircraft CARRIERS killing 20,000 Americans!" He was NOT SANCTIONED, no one even called him out as WRONG, NOT EVEN LEADER XI JINPING. Since B.O. let China expand, and build islands,& bases then FULLY ARM with MISSLES & WEAPONIZED them ACTIVELY. B.O.did NOTHING. President Trump has called it out for years, But with China's leader NOT able to have a consensus meeting of the COMMUNIST party regime leaders meeting last month, maybe the Dems should pull their heads out and realize its China, Not Russia that poses the Real threat. We the dirty fingernail worker's USA LEGAL CITIZENS TAXPAYERS voted for & are , 100% behind our president Trump. The only president to DONATE ALL HIS WAGES WHILE IN OFFICE,& WILLING to try to fix the problems all the Weak knees politicians that sold out USA SECRETS & MANUFACTURING to China, and the rest of the world. President Trump has made progress, tho most of the media has NEVER reported it ,without FULLY opposed biased. Thank you Charles PAYNE investigate this information about China please. Thank you FBN. Thank you president Trump for being the one president to actually try &succeed at helping ALL AMERICANS LEGAL IMMIGRANTS & CITIZENS. It's a volatile situation but still a bulls mrkt 2019. Life is great, invest long.

J on 1/2/2019 1:47:30 PM
 

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