On Tuesday, I shared the history of past market swoons (courtesy of Bespoke Research). It followed the times the S&P 500 was down five days in a row and gapped down more than 1% the following Monday.  Interestingly, most of the time, the market rebounded above Monday’s opening trade (see table) over the course of the next week.

Oversold Bounces	Prior Week	Gap Down Open	Week from Open
March 9, 2009	-6.78%	-1.41%	+11.64%
August 8, 2011	-7.15%	-2.64%	+3.17%
September 12, 2011	-4.15%	-1.25%	+5.10%
November 21, 2013	-3,70%	-1.46%	-0.12%
June 24, 2013	-2.52%	-1.04%	+2.51%
August 24, 2015	-5.53%	-5.23%	+5.43%
February 8, 2016	-2.98%	-1.16%	+2.16%
May 13, 2019	-2.02%	-1.97%	+0.54
August 5, 2019	-3.11%	-2.18%	???

 

Don’t look now, but history is on the verge of repeating itself. Moreover, those monster gaps created during Monday’s carnage are also on the verge of being filled.

Gaps are created between the difference in the opening price print from the close of the prior session. Large gaps of more than 1% take on technical significance. Routinely, the price of the underlying asset will reverse and go in the opposite direction where one gap has been filled. However, when those gaps are filled and there is no directional change, it’s seen as an action signal: buy if it’s an upside gap and sell if it’s a downside gap.

Remarkable Bounce

Consider that the Dow Jones Industrial Average rallied almost 1,000 points higher from the early-morning lows of Wednesday, and it’s not even the best performer this week.

The S&P 500 and the NASDAQ have turned positive for the week, while the more dollar-sensitive Dow Jones Industrial Average continues to lag. The S&P 500 and the NASDAQ are within shouting distance of their respective gaps (Friday’s close), so that will be an earlier resistance.

Mind the Gap	Aug 2 Close	Aug 5 Open	Aug 7 Close
S&P 500	2,943	2,898	2,938
NASDAQ	8,056	7,823	8,039
Dow Jones Industrial	26,528	26,259	26,378

 

What’s Moving the Market?

For all the exhaustive talk about Chinese trade and the Federal Reserve, corporate earnings are the real story of the week. The good ole-fashioned investing truism, where earnings drive the market, is playing out and saving the day. The biggest winners of the week have posted strong earnings and guidance or have released news that changed the fundamental story.

Conversely, those names that released financial results that missed or didn’t leave investors in awe pay an exorbitant price. After missing, these were just some of the names taken to the woodshed:

• Green Dot (GDOT): -42%
• Camping World Holdings (CWH): -16%
• Kraft Heinz (KHC): -9%

While I think there has been a negative overreaction in many stocks, including a few in our model portfolio, investors have to grapple with holding them or moving on. Nonetheless, no one should let paper losses stop them from buying names that are working and have more upside potential.

S&P 500 Index	+1.88%
Communication Services (XLC)	+2.01%
Consumer Discretionary (XLY)	+1.93%
Consumer Staples (XLP)	+1.29%
Energy (XLE)	+2.87%
Financials (XLF)	+1.91%
Health Care (XLV)	+1.33%
Industrials (XLI)	+1.70%
Materials (XLB)	+1.91%
Real Estate (XLRE)	+1.58%
Technology (XLK)	+2.45%
Utilities (XLU)	+1.03%

Summation

The talking heads are going to continue to talk up a recession or some other cataclysmic event that destroys the stock market. We know they have the soapboxes, and that such chatter almost tripped the U.S. economy into a recession in December. 

On trade, I hope President Trump doesn’t apply those 10% tariffs on September 1, because we are winning the trade battle, despite American special interests cheering otherwise. There must be a window of negotiation, and a thaw should happen ahead of the September meeting.

Some Americans cheered the surprising bounce in Chinese exports as a sign that China has leverage.  There were increases:

• European Union (EU): +6.5%
• Association of Southeast Asian Nations (ASEAN): +15.6%
• Korea: +9.2%
• Taiwan: +19.9%
• Australia: +1.1%

Declining Chinese Exports

• U.S.: -6.5%
• Japan: -4.1%

Look at ten years of Chinese exports, and last month was near the upper end of the range that initially peaked in late 2014. America’s market cannot be replaced. Over time, these numbers will tumble hard, especially as the pace of supply chain relocation picks up. I don’t think the goal is to hurt China’s economy, just to make them a fair partner. 

It’s up to China whether they want to do this or not, but we aren’t going to lose.

China Exports

Portfolio

Communication Services	Consumer Discretionary	Consumer Staples
1	3	1
Energy	Financials	Healthcare
1	2	1
Industrial	Materials	Real Estate
2	3	1
Technology	Utilities	Cash
2	0	3

Today’s Session

Producer Price Index (PPI) final demand was in line, up 0.2% month over month, however Core, ex food and energy, missed, coming in at 0.1%.  Year over year, PPI is up 1.7%, flat compared to June, and Core PPI increased 2.1%.

Producer Price Index 2018	Total final demand	Final demand less foods, energy, and trade
July	0.1	0.3
Aug.	0.0	0.2
Sept.	0.1	0.3
Oct.	0.8	0.3
Nov.	-0.1	0.2
Dec.	-0.1	0.0
2019
Jan.	-0.3	0.2
Feb.	0.2	0.1
Mar	0.4	0.1
Apr	0.3	0.2
May	0.1	0.4
June	0.1	0.0
July	0.2	-0.1

 

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