Futures UP as FOMO Permeates the Mindset

Stocks closed at record highs again on Friday as the FOMO (Fear of Missing Out) continues to tell the story of investors and asset managers alike.......improving economic stats and solid earnings are driving the action while investors continue to bet on promised reforms in the tax code as well as reforms in regulation (think DE-regulation) across a range of industries - financials, energy, Pharma, manufacturing etc.  Talk of more gov't spending and bullish commentary from Janet Yellen and other members of the FED round out the story. 
 
Complacency - represented by the VIX (11.88) - while a bit higher,  continues suggest that investors are not concerned about stock prices or valuations at the moment....and in fact - stock prices and the VIX moved in unison last week - which is something that should scream - Caution - Slippery When Wet!  Complacency usually hits its highest - which means the VIX is in the 10-12 range - at the top of the cycle - when the action doesn't make sense based on the fundamentals....(think of that Irrational Exuberance mindset).
 
In fact last week - stock prices and the VIX moved in tandem with each other - a clear sign that there is a disconnect between what the mkt is telling us vs. what investors expect.  (Both moved higher - and that is the disconnect)  If you are one of those traders that pays attention to technical indicators - this one is one to watch....  When investors become complacent, (usually at the very top of the rally), they begin to take chances that they may not otherwise take.....they essentially 'throw caution to the wind' as they look to just 'get in'.... Their thinking is - the mkt doesn't seem to want to go down....so therefore it can only go up......and this is where you are going to get caught.....- they go ALL in and leave nothing in the kitty.....and then - when the mkts suddenly do a 180 they panic....and they scream that the system is rigged etc....when in fact it is not....

These investors have chosen to be erratic vs. methodical....methodical is a plan over the long run - erratic is not a plan at all....it's erratic.  So when the mkt turns - they once again become erratic and usually sell out at the bottom - exactly when they should have been buying more.....So keep your eyes on the VIX - it has just pierced it's 50 dma (short term resistance) and is now heading towards its 100 dma at 13.20 (the higher the VIX goes the more it suggests a pullback) ......as the VIX moves up - stay tuned....watch for underlying weakness in the broader mkt.....

[When the VIX spiked higher in Oct/Nov (11.90 to 23) the S&P lost 4% of its value, then it backed off to the 10.50 range (post election) and the mkt soared.....then it spiked again in January (10.50 - 13) and the mkt lost 2% of its value.....it is now attempting to spike again as it pierced short term resistance at 11.78.....a spike to intermediate term resistance could cause the S&P to back off a bit...nothing dramatic at all - but then IF it continues to move higher - the reality of a broader pullback becomes more of a reality. ]  

Now we have discussed how the mkts are pricing in perfection -  maximum optimism, increasing earnings, better guidance etc. - since the Trump election and that IS true.....but something has to give....something has to happen vs. just the rhetoric......reforms have to start to take place - otherwise investors will get frustrated - especially as the FED moves on rates......moves that the mkt is also pricing in because it expects movement on the reform front.....If we get higher rates and less reform then don't be surprised to see the VIX spike (mkt backs off) as investors re-price assets.

And what of earnings?  Right now the mkt expects 1Q earrings to grow at 11% y/y......(very aggressive) - but if we start to see analysts revise estimates lower next month (March) - then how can prices continue to trend higher?  I'm just sayin..... Something has to give. 

Soft vs Hard data...what is the difference?  The soft data is that stocks prices are rising as the optimism builds....the Hard data are the facts....what do the eco stats tell us? What are analysts doing to earnings estimates? What is happening at the FED?  And as we know - nothing lasts forever...... One of two things is going to happen -

1.  Either earnings do explode higher and guidance continues to show improvement and the eco  stats support this - justifying current valuations - OR

2. Reforms come under attack, interest rates go up anyway, the bond mkt finds a floor,  the dollar gets stronger (higher rates = stronger dollar) Multi-nationals get clocked (stronger dollar)  and mkt valuation comes under pressure to reflect this new outlook - causing stocks to back off as investors re-price the risk.

In the end - it is never a dull day....

This morning we heard from HD (Home Depot) - they crushed it!  They reported earnings of $1.44 vs exp of $1.33.   Revenues of $22.1 bil vs. exp of $21.8 bil and Sales are up 5.8% vs. the 3.7% expected increase....They raised the dividend to 89 cts/sh and announced a $15 bil stock repurchase plan......the stock surges in pre-mkt trading - UP almost 2% at $145.61......
 
WMT up next...they reported $1.30 vs $1.29...so in line....but the real news is that their attempt at becoming an 'Online retailer" is gaining ground.....CEO Doug McMillon has this to say:
 
"We're moving with speed to become more of a digital enterprise"  The stock is up 1.4% in pre-mkt trading.....at $70.10....
 
US futures are UP 5 pts in early trading. as investors eat it up.......On the economic front - look for Markit US Manf PMI of 55.3, Markit US Services PMI of 55.8 - both would be bullish.....
 
After a quiet weekend of both economic and political drama - the path of least resistance feels like it is up.....and so it goes....remember - New Highs beget New Highs.....as FOMO permeates the mindset.....If the data is as good as it suggests - then we should see the VIX back off.
 
Economic data in Europe was strong..... Composite (EZ) PMI hits 56.0 - the highest level since April 2011. (France at 56.2 vs. 54.1 and Germany at 56.1).....and this supports the story of a recovering Eurozone.....which then reawakens the ECB interest rate policy conversation.....Like here - rates have to start to normalize and if the economy can support higher rates then it's all good....but investors will be the judge of that......  FTSE -0.08%, CAC 40 + 0.23%, DAX +0.51%, EUROSTOXX  =0.40%, SPAIN +0.16% and ITALY +0.45%. 


Oil is up small but still within the $50/$55 range......and the Dollar index is up 0.57 at 101.53.  Gold as expected is down $8 at $1,231/oz....(down because the improving eco picture around the world will put pressure on Gold). $1,223 does represent support - so keep your eyes on this level. 
 

Take Good Care
KP

Pan Roasted Chilean Sea Bass

You will need:  1 lb of sea bass, olive oil, butter, onion, White Wine, Fresh wild mushrooms, Chicken stock, s&p, and chopped parsley for color.
 
Prepare by chopping the onion, slicing the mushrooms and chopping the parsley.  Have all other ingredients out on the counter to ease the process of creating this dish....
 
Preheat the oven to 450 degrees - this is important to make sure that the oven is ready to receive the fish without having to "heat up". 
 
In a sauté pan - heat the olive oil and the chopped onion - cook until soft and translucent.  Turn the heat to high to make the pan really hot - then remove the pan from heat and Deglaze with 1/4 cup or so of Wine -   When the wine has cooked off add the sliced mushrooms and about a tblsp of butter.  Reduce heat to med and cook until tender.
 
Now add the chicken stock - maybe 1/2 cup or so....and s&p...let it cook down.....just so it thickens a bit.....
 
In another sauté pan heat up a bit more olive oil...season the filet with s&p and add to the pan skin side down for about 5 mins...you want the skin to be crispy......flip and cook for about 1 min - transfer to a baking dish and put in the pre-heated oven and roast for another 4 / 5 mins. 
 
Warm the serving dishes and place a bed of the onion/mushroom mixture on the plate and then top with the pan roasted filet.  Adorn with a bit of chopped parsley.  You can serve this dish with herb/garlic wild rice and sautéed green beans.  Complement with a cold bottle of Pinot Grigio - Santa Margherita, light the candles, turn down the lights..... and you are off to the races....

Buon Appetito.