There were several efforts to rally the market yesterday, but it was clear out of the gate that the session would be a struggle. By the closing bell, the bulls gave up the ghost. The market breadth was muted except measures of 52-week milestones. The NYSE saw 146 new highs and only 34 new lows, while the NASDAQ Composite saw 136 new highs against 72 new lows.

The market is searching for a catalyst during earnings season, which has seen very strong results on revenue and okay results on earnings that are generally beating. Obviously, the market has had a great year, and bias shifted to the upside after the late August breakout, but the rally lacks oomph. Meanwhile, experts continue to make certain assumptions based on major indices being at or near record highs. There are two incorrect assumptions: the market is too expensive, and investors are too ebullient.

I much prefer forward price-to-earnings (Forward P/E) ratios. Right now, the S&P 500 is at 2016 levels. The problem gets “cheaper” as more earnings beats come through.

Then there is the notion that investors are giddy. It couldn’t be farther from the truth. Professional investors are huddled together, cowering in fear like a bunch of long-tailed cats in a room filled with rocking chairs. Individual investors are also more likely to be neutral on the market than bullish.

Bullish	Neutral	Bearish
35.6%	36.1%	28.3%
Source: AAII

The market is anything but over-enthusiastic. On the contrary, in addition to better-than-expected earnings, investors need something else.

Light My Fire

You know that it would be untrue
You know that I would be a liar
If I was to say to you
Girl, we couldn't get much higher

-The Doors

The Federal Reserve is expected to cut rates today, but the Street needs Powell & Company to light their fire with a clear nod to future rate cuts. If they do the opposite, it could douse the small flame that already exists.

Portfolio Approach

We went heavy in Industrials (XLI), and it is paying off big time. Three names in the model portfolio have surpassed our buy limits. There are other ideas in the sector we believe are still within buying range.

Portfolio Approach

We closed on Fastenal (FAST) for an 8% gain over a very short period. I like the stock, but I wanted cash and felt that the stock price could meander and grind away in the near term.  We added a new Consumer Discretionary yesterday as well. 

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

 

After the Close

The earnings parade continued after the close with several well-known companies posting results, including Mattel (MAT).

• Barbie’s career series of dolls was the biggest moneymaker: $567.6 million +10% (+12% constant currency)
• Hot Wheels: $293.3 million +25% (27$ constant currency)

Shares of Mattel popped 20%, as the shorts had bet the ranch on the company going the way of the Pet Rock or those Duncan yo-yos. Coming into the session, 46% of the float is short.

Other earnings winners: Unisys (UIS), Maxim Integrated Products (MXIM), Concho Resources (CXO), PriceSmart Inc (PSMT), Herbalife Nutrition (HLF), and Boston Beer Company (SAM).

While old-school Barbie was staying alive, Electronic Arts (EA) wiped out after initially trading higher on its financial results.

Today’s Session

It’s Fed day – more on that on the afternoon note.

3Q GDP Report

At 1.9%, third quarter GDP beat Wall Street consensus of 1.6% (some of the most respected analytic firms were looking for an even smaller print), and it was driven by the consumer +2.9% vs consensus 2.4%.  The biggest highlight was the increase in residential investment.   

Weakness in trade took almost a full percentage point off the report.

Personal Consumption

Goods 5.5%

• Durable 7.6%
• Non-Durable +4.4%

Services +1.7%

Investments -1.5%

Fixed -1.3%

Nonresidential -3.0%

• Structure -15.3%
• Equipment -3.8%
• IP +6.6%

Residential +5.1%

Home Sweet Home

Residential Investment climbed nicely after six consecutive quarters, and eight out of the past nine quarters of decreases.  With U.S. homeownership rate at its highest level since 1Q2014, there is no doubt the overall economy and low rates are making it possible for greater household formation.

Housing starts and permits continue to improve this year, and existing home sales are trending higher as well.  I’m not sure how much the Fed factors this in, but they should be thrilled and not curb this trend.

What about that inverted yield curve?

Remember those three days in August when the two- and ten-year yield inverted, and it was the end of the world?

Well the difference between the two has expanded significantly since then, so I wonder if the Fed is still modeling for any chance of recession.

The media certainly would let it go, but then again, their mission isn’t economic outlook or true analysis.  

Comments

Charles very funny.. great metaphor " you wrote " Professional investors are huddled together, cowering in fear like a bunch of long-tailed cats in a room filled with rocking chairs. Individual investors are also more likely to be neutral on the market than bullish." Seems like whole public market is caught between Wall Street hyping their own fraudulent book of not value add or Chinese companies and the Trump administration trying to refocus economy on real value add creation in manufacturing, construction, IT software creation. The political environment creates vast uncertainty Trump's efforts will continue. Likely will but I think "fly over country", "working investors", value investors have to have massive fog in front of their headlights. I know I do :) jon kirkegaard on 10/30/2019 10:02:24 AM

Great point Jon The "experts" are beside themselves and while they lapped up hundreds of billions in extra money from tax cuts and regulation cuts they're anger toward fighting back against China has been appalling.  The good news is those pros have to come into the market at some point (I;m sure most are praying for a pullback for entry points). Working investors have to keep an eye on the bigger prize and not be lulled into fear or panic by the pros.  Thanks a lot.  CP Charles Payne on 10/30/2019 10:10:12 AM

The juvenile egocentric Politicians in DC ( especially the DEMs right now, but both to some extent) will not do their jobs and focus on their specific obligations to serve the public interest! They will potentially wreck the economy in their zeal to best the other party for their own self interest and power based positions. Our Political situation currently is dysfunctional and that endangers our economic vitality as well as our respect on a Global basis. garro on 10/30/2019 10:41:42 AM

Finished your book: "Unstoppable Prosperity" recently and loved it. Going to send copies to my kids. As a CPA/MBA with an engineering undergrad focus I thought investing would be easy. Well I am pushing 80 now and have made just about every investing mistake covered in your book. I studied fundamentals, charting, options, etc. but never put it all together (the "three pillars") like you did. I have never seen so much investing wisdom and technique spelled out so well. Thank you. Dick Nicholson on 10/30/2019 1:10:40 PM

Oh My  Thank you so much Dick, This is the best compliment ever.  Thank you so much you have no idea how much this makes my day.  The book is three decades of working directly with individual investors and lots of personal sacrifices, too.   Charles Payne  Charles Payne on 10/30/2019 1:17:38 PM

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