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9/5/2019 10:00:43 AM Eastern Time

KNOCKING ON THE DOOR & CHAMPING AT THE BIT
By Charles Payne, CEO & Principal Analyst

 Click here to download PDF version

Wednesday was a good session that almost became a great session, except those pesky resistance levels held again. Still, major indices closed near the highs of the session, and there’s a sense some serious would-be buyers are champing at the bit and ready to pounce

 

Key Resistance Points

S&P 500

Dow Jones Industrials

NASDAQ Composite

2,938

26,485

8,039

Market breadth was better with very little downside volume, which underscored a sense of urgency for would-be buyers, especially when stocks they’ve been spying began to lift off. 

NYSE

  • Advancers: 2.356
  • Decliners: 605
  • Up Volume: 2.22 billion
  • Down Volume: 356 million
  • New Highs: 213
  • New Lows: 30

NASDAQ

  • Advancers: 2,116
  • Decliners: 1,017
  • Up Volume: 1.19 billion
  • Down Volume: 390 million
  • New Highs: 78
  • New Lows: 81

Champing at the Bit

There are a ton of seriously oversold stocks making big moves in recent sessions, but that doesn’t mean every big loser is a buy or will have a sustained bounce.

In fact, my biggest losers this year have all been from attempts to buy “oversold” names too early. 

Momentum

The bottom line is big-time money managers have a great chance to catch the market and will naturally look to high-Beta momentum names that typically drive Communication Services and Technology sectors. The great news is that there is also value in many of those names as well.

Value

Speaking of value, big moves in Industrials led by General Electric underscore the fact that there is a fair amount of bottom-fishing going on, as the top five movers in the sector have been underperformers:

Year-to-Date

  • General Electric (GE): +21% (note: -70% over the past three years)
  • United Rentals (URI): +10%
  • FedEx (FDX): -1.4%
  • Quanta Services (PWR): +12%
  • Alaska Air Group (ALK): +1.5%

*I’m pounding the table on URI for long-term investors.

S&P 500 Index

+1.08%

Communication Services (XLC)

+1.94%

Consumer Discretionary (XLY)

+0.99%

Consumer Staples (XLP)

+0.90%

Energy (XLE)

+1.40%

Financials (XLF)

+0.98%

Health Care (XLV)

+0.07%

Industrials (XLI)

+1.27%

Materials (XLB)

+1.23%

Real Estate (XLRE)

+0.83%

Technology (XLK)

+1.71%

Utilities (XLU)

+0.09%

 

Here Comes the Fed Talking Heads

Text Box: Federal Reserve Regions Reporting Wages Growth via ‘Beige Book'AtlantaBostonClevelandPhiladelphiaNew YorkChicagoMinneapolis DallasKansas CitySan FranciscoSeveral regions also pointed to strong consumer spending and improving business optimism. Fed officials were everywhere yesterday, and they have taken up their own causes and positions as the Federal Open Market Committee (FOMC) gathering promises to be one of the most consequential Fed meetings in recent memory. Meanwhile, former NY Fed President William Dudley made a half-hearted attempt to clean up comments in the now infamous Bloomberg op-ed.

It wasn’t nearly good enough, and it suggests the Fed should have domain over the executive branch, with respect to policies and approach. Ironically, this same Fed stood by as President Obama ran up massive deficits and perhaps enabled by the printing of trillions of dollars. #Justsaying

The remarks I focused on the most were by NY Fed President John Williams, who laid out a great piece on why the Fed needed to be proactive with respect to deflation. 

He had to walk back some of his comments. However, he reiterated his low inflation concerns yesterday at the Euromoney Real Return XIII: The Inflation-Linked Products Conference 2019, New York City; his remarks:

(Low) Inflation Risks

Low inflation is indeed the problem of this era. The current outlook of moderate growth, low unemployment, but stubbornly low inflation is a reflection of the broader economic picture—the July rate adjustment an appropriate response to ease financial conditions and support the economy.

How the U.S. outlook evolves in the future is fundamentally tied to the fortunes of the economies around the world. As I look ahead, I’m keeping a keen eye on all the data, both domestic and global, and the implications for our economy. With an uncertain outlook, vigilance and flexibility are essential for achieving our dual mandate goals of maximum employment and price stability. Persistently low inflation, heightened uncertainty, and global cross-currents make this a particularly challenging time for monetary policy, and my laser focus is on doing the best we can to support a strong economy and achieve our 2 percent inflation goal. -John Williams

 

Retailers & Tariffs

Goldman Sachs (GS) held a retail conference, and for the most part, most participants had the same comments on the costs and the impact of tariffs. Essentially, their vendors and they will eat most of the costs of tariffs, including the fourth tranche.

American Eagle Outfitters (AEO)

AEO is making progress to reduce exposure to Chinese tariffs through by partnering with vendors and diversifying geographic production capabilities.  Management doesn’t expect a material impact this year from the latest tranche (List 4) and says the impact will be manageable in 2020.

By the Way…

The inverted yield curve went away yesterday at least, as measured by the two and ten-year Treasuries.

  • 2-Year: 1.436
  • 10-Year: 1.471

Approach

Communication Services

Consumer Discretionary

Consumer Staples

1

2

1

Energy

Financials

Healthcare

1

1

2

Industrial

Materials

Real Estate

3

2

1

Technology

Utilities

Cash

2

0

4

 

Today’s Session

ADP Employment Report

195,000 blows away consensus of 140,000

I like that small business hiring picked up but would like to have seen more goods producing (dirty fingernails) jobs.

  • Small (1-49 Employees) 66,000
  • Midsized (50-499 Employees) 77,000
  • Large (500 + Employees) 52,000

Goods Producing

  • Natural Resources & Mining -2,000
  • Construction 6,000
  • Manufacturing 8,000

Service Providing 184,000

  • Trade, Transportation & Utilities 39,000
  • Information -6,000
  • Financial Activities 5,000
  • Professional & Business 35,000
  • Education & Health 58,000
  • Leisure & Hospitality 42,000
  • Other Services 11,000

I like that the market edged higher after the ADP report and gained even more momentum when productivity data came in stronger than expected including unit labor cost of 2.6% against estimates of 2.4%.

Long Idea: Macy's, Inc. (M) @ $15.12
Industry: Consumer Discretionary; Specialty Retail
Click here to view the trading alerts that followed this recommendation

Trading Parameters
Status Closed
Entry Price$15.12
Entry Limitsee comments
Stop LossN/A
Target$17.00
Adjusted Target $18.80

BACKGROUND: Macy's, Inc., an omnichannel retail organization, operates stores, Websites, and mobile applications. The company sells a range of merchandise, including apparel and accessories for men, women, and children; cosmetics; home furnishings; and other consumer goods. As of April 1, 2019, it operated approximately 680 department stores under the Macy's and Bloomingdale's names; and 190 specialty stores, such as Bloomingdale's The Outlet, Bluemercury, Macy's Backstage, and STORY in 43 states, the District of Columbia, Guam, and Puerto Rico. It also operated macys.com, bloomingdales.com, and bluemercury.com. In addition, the company offers licenses for its stores; and operates a beauty products and spa retailer under the bluemercury name. The company was formerly known as Federated Department Stores, Inc. and changed its name to Macy's, Inc. in June 2007. Macy's, Inc. was founded in 1830 and is based in Cincinnati, Ohio.

SKINNY: Estimates are increasing, and we like the action we are seeing in the stock. Shares of Macy's are oversold, and we are expecting a trading bounce. Our target $17.


Key Fundamentals
PEG  -0.37
Book Value  20.44
Institutional Holdings  95.26
Price/Sales  0.17
Average Daily Volume  10.88M
Shares Outstanding  308.92M
Market Value  4.70B
Insider Activity  8 Buys 4 Sales
52-week High  38.35
52-week Low  14.2
Annual Earnings Estimate  2.89

Analyst Coverage
 Guggenheim – Downgrade  Neutral
 Telsey Advisory Group – Reiterated  Market Perform
   



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