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After a phenomenal rally since the FED lower rates again in October, equity markets seem to be marking a pause and ended the week on a marginally lower tone.
By contrast, our model portfolio rose + 1.74 % for a +24.17 % performance year to date and a +20.95 % annual average performance since launch on January 1st 2014.
The question in everybody’s mind is whether we will have a year-end rally and optimism has come back in a big way with commentators and investors alike.
A year after the U.S. stock market plunged, many investors believe conditions are in place for a rally to finish off 2019. A more accommodative Federal Reserve compared with a year ago is an important argument for investors who are confident the market is unlikely to see a repeat of 2018’s swoon. Last year, investors were concerned the Fed was raising interest rates too quickly. By contrast, the Fed has been cutting rates this year, and while the central bank is not expected to lower rates again in December, it also is not expected to raise them.
Another change from a year ago, cited by investors: Stock markets globally are more synchronized in their strong performance.
Economic news has not been so bad lately, in the US where consumer confidence was a better than expected, in Europe where France is giving signs of strong expansion and in Asia where Japan and South Korea struck a last-minute deal to rescue their expiring intelligence-sharing pact.
U.S. consumer sentiment extended gains in mid-November as Americans’ economic outlook improved against a backdrop of solid hiring, record stock prices, and the prospect
of a trade truce with China.
The University of Michigan’s final sentiment index advanced to 96.8 in November from 95.5 in October, data showed Friday. It was also above both the preliminary reading and median analyst
estimate of 95.7. The gauge of current conditions decreased to 111.6 while the expectations index climbed to 87.3, and both were higher than in the initial report.
One wild card for markets heading into year-end is the United States’ trade war with China. The dispute remains unresolved, but there is optimism about a preliminary U.S.-China trade agreement that could also lift stocks into the new year, despite US Congress passing a Law supporting the mass protests in Hong Kong and Donald Trump’s tweeting that if it was not for him, Hong Kong would have been swamped by the Chinese Army in 17 minutes.
Another puzzling factor is the rise of the US equity markets in the face of declining corporate earnings.
Last year, the benchmark S&P 500 fell 19.8% – barely avoiding a bear market – between Sept. 20 and Dec. 24 as the FED was raising rates to contain inflation. Inflation is higher today, but the FED lowered rate three times since the summer as an “insurance” policy.
Equity indexes around the world have joined U.S. stock averages in recent weeks in setting new highs. So far this year, Europe’s Stoxx 600 is up about 19% and recently hit its highest level in more than four years.
So what are the prospects for a year-end rally?
The last five trading days of the year and the first two of the new year comprise the traditional Santa Claus rally, according to the “Stock Trader’s Almanac.”
In 2018, the market bounced back after its Dec. 24 plunge, resulting in an overall gain of 1.3% for those seven trading sessions – right in line with the historical average, based on the almanac’s data going back to 1950.
But any absence of a Santa Claus rally could portend rough times for the market in the months ahead. “Santa’s failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices,” the almanac says.
A year-end rally could be derailed by any upset on the U.S.-China trade front, any negative development in the Impeachment process, or any unexpected credit risk event
Equities continued to push higher on most days on optimism the two sides are still talking.
On Friday, Donald Trump and Xi Jing Ping both underscored their desire to sign an initial trade deal and defuse a 16-month tariff war that has lowered global growth, providing a welcome boost to financial markets.
Chinese President Xi Jinping, in rare comments on the trade tensions with Washington, said Beijing wants to work out an interim or ‘phase one’ trade pact, but is not afraid to retaliate when necessary.
“We want to work for a ‘phase one’ agreement on the basis of mutual respect and equality,” Xi told representatives of the New Economy Forum in Beijing,
“When necessary we will fight back, but we have been working actively to try not to have a trade war. We did not initiate this trade war and this is not something we want.”
Hours later, U.S. President Donald Trump said a trade accord with China is “potentially very close,” although he insisted that any deal would have to be weighted to favor the United States after years of trade imbalances with China.
Speaking on Fox News Channel’s “Fox & Friends,” Trump also urged China and Hong Kong to calm the situation in Hong Kong, wracked by months of pro-democracy protests, calling it a complicating factor in the trade talks.
The prolonged dispute between the world’s two largest economies is lowering global growth, disrupting supply chains, curtailing investment and curbing business confidence and monetary Policy has reached its limits in terms of economic impact.
It looks like the US is ready to forfeit the Tariffs announced for Dec 15th with or without agreement and Xi Jong Ping seems to have accepted the fact that Donald Trump can do nothing to prevent US Congress from voting their support for Hong Kong’s protesters.
However, warnings signals are accumulating on the technical front
Warning signals started last week on the Nasdaq, and over the past several sessions, have morphed into a cluster of technical warning signs triggering on both the Nasdaq and NYSE.
Over the past 7 days, the cluster has been one of the largest in more than 30 years sending both HINDENBURG OMEN and TITANIC SYNDROMES. There have been 11 signals in the past 7 sessions counting as one of the largest clusters in more than 30 years.
The long- term McClellan Summation Index to make repeatedly lower highs, a sign of deterioration beneath the surface.
Finally, most equity indexes are marking tops this week. The strong yearly performances of equities and the strong performance of the past three weeks may lead fund managers to take their profits ahead of Christmas and the year-end.
It is not every year that equity markets are up 20 % and being greedy for the remaining 5 weeks of the year may not be the prudent thing to do.
For choice, we remain cautious.
We have reduced our long exposure, are now fully hedged, have increased our cash levels, and have increased some of our shorts in the technology leaders last week.
Elsewhere in the world, Chile is still witnessing major popular unrest as subway fares increase infuriated the population, Lebanese crowds prevented Members of Parliament to vote an amnesty Law that would have prevented politicians from being prosecuted for corruption, Hong Kong’s University was evacuated by force while Iran resorted to cut the internet and send the revolutionary guards to quell mass protests against a rise in fuel prices.
Argentinian bonds rose on positive talks between elected President Fernandez and the IMF and Bitcoins collapsed following a Chinese crackdown on. the crypto-currency.
The ARAMCO IPO is in full swing but demand seems limited outside of the Saudi Kingdom where the Government instructed banks to lend generously against the stock.
Ali Baba successfully raised US$ 14 billion in its Hong Kong IPO adding to its US$ 44 Billion mountain of cash.
Our 11 % exposure to precious metals was a marginally positive contributor last week as Silver rose slightly while Platinum succumbed under the weight fo record long speculative positions. We stay long as a hedge against any systemic risk.
Our Republic of Argentina position is starting to pay off with a 7.8 % rise last week as the market realizes that the hair cut embedded in the current price will never materialize. Fernandez has no interest in squeezing investors and his strategy will be a negotiated extension of maturities rather than an abandoning of principal.
US Equities Long
The worst seems to be over for our small exposure to US small caps with our Cannabis play rising 32 % in line with the whole sector and TITAN MEDICAL absorbing its US$ 15 million fundraising exercise.
We have tactically trimmed our portfolio of European taking our profits in BNP and GENERALE as well as in our Turkish equity ETF.
India and Emerging Markets
Emerging markets were seriously negative last week with DAMAC properties losing 7 %, Korea losing 4 % India and the UAE losing 1.5 % and Vietnam sending a very negative technical SELL signal.
We reduced exposure by selling our Argentinian ETF which did not deliver the expected performance and will probably sell Vietnam next week.
Our portfolio of Chinese equities did well last week with strong performances of ALI BABA HEALTH, our gaming company PERFECT WORLD that rose 30 % leading us to take our profits there, and our auto value gems China Zheng Tong and Shanghai Dong Zheng AFC rising by 3 to 4 %.
The Chinese domestic indexes are testing crucial levels and deserve to be watched carefully.
US Equities Short Positions
Our model portfolio is suffering from the last tail of the rally in the highly concentrated FAANGs were we are short for strategic reasons.
This is the area that has led us to give back some performance since our September peak but we stick to our guns and it is only a matter of time before these stocks roll over and start what will be a severe bear market.
The short portfolio was a negative contributor with NETFLIX, AMD, and FACEBOOK rising while Google and Apple fell marginally. We increased our shorts in AMD and Apple Inc.
Most of those stocks have risen 50 % since the beginning of the year and are due for a major correction.
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