Retail Was an Anomaly, Talks Move to DC and the Markets Test Support

What You Need to Know Today

• Retail Sales report was an anomaly

• Trade talks move to DC

• European economy on shaky ground – German ZEW survey at 4 yr low

• Bernie Sanders enters the race for 2020

Stocks surged again Friday.....as the trade talks continued to progress, Donny offered to extend the March 1st deadline and some weaker US macro data suggests that the FED is not only on hold for 2019, but has left some to speculate that the next move is a CUT vs. an increase.... The Dow gained 442 pts or 1.7%, the S&P added 30 pts or 1.009%, Nasdaq rallied itself out of the late 2018 BEAR mkt and gained 45 pts or 0.61% (taking it up more than 20% from the December 24th low) , the Russell small/mid cap index surged by 24 pts or 1.56% and the Dow Transports tacked on 30 pts or 0.29%. All the major indexes are now up double digits for the year with the Russell leading the way up a whopping 16% ytd, the Dow +11%, S&P +10.7%, Nasdaq + 12.6% and the Transports up 15%.

Earnings season is doing just as expected with about 72% of reports beating the estimates – funny how that is always the number – every qtr its about 72% that beat while the balance hit the target or miss – investors/traders/algo's/analysts and strategists all recognizing that maybe – just maybe – things aren't nearly as bad so many had predicted. Overall – the best performing sectors to date are the industrials – XLI up 19% (and that makes sense if you think that the US and China will strike a deal) , Energy – XLE up 17%, Consumer Disc up 13%, Tech – XLK up 13% and Communications - XLC up 13%....lagging a bit are Healthcare – XLV up 8%, Consumer Staples up 8% and Utilities – XLU up 6%.

Last week's retails sales disaster is a perfect example of things gone wrong – with that report plunging in the face of what was an explosive holiday shopping season - it made no sense – (see my note from Friday). My partner – Nancy Tengler – also points this out in her weekly piece this week – suggesting that the mkt turmoil in late 2018 and the plunge in December consumer confidence – as detailed by Cornerstone Macro's daily surveys – is nothing but a distant memory. She goes on to say;

"Additionally, disposable income (DPI) is growing at a real rate of 3% year over year. We expect to see a bump to DPI in the first half of 2019 as consumers benefit from additional tax benefits from TCJA—a reduction of an additional $184B in net tax payments. Finally, workers in the lowest income decile are enjoying the fastest wage growth since the early 2000s according to CSM. In the last two years this group has averaged 5% wage growth—the highest among workers—and these earners tend to spend incremental income. Watch WMT and COST and AMZN in Q2."

Next up are the trade talks and that ongoing drama – with the mkt surging one day only to collapse the next depending on the words in the headlines that suggest either excitement or despair........and last week's action was no different. On the 7th & 8th of February – the mkt came under pressure when the headlines were suggesting a stalemate -and then an ‘anonymous source' used the phrase ‘far apart' again and that is all the algo's needed to hear – the mkt began to roll over falling 550 pts over those two days before settling down some 300 pts to end the week....and then last week – as the talks were under way in Beijing – WH advisor Larry Kudlow assured us that there were ‘good vibes' coming out of the talks in Beijing while Donny teased with the idea that he could move his drop dead date and the mkt soared – taking all of the indexes up better than 3.5% with the transports up leading the way up 5.2%. And so it goes....now with the US mkts closed yesterday for President's day – trading this morning is a bit cautious....on Monday – the Asian mkts soared on the back of Friday's news that talks were progressing, European mkts while higher on Monday did not set any records –

Overnight again for Tuesday trading – Asian mkts ended the day a bit lower on new evidence that there is still plenty of tension between the US and China over trade. Xi Xi made it clear that the US is trying to create fear by suggesting that Chinese mobile network products pose a cybersecurity risk to ‘any country' that uses their equipment with the US alleging the Chinese tech companies ‘gather intelligence' and then send it back over to Beijing. Stephane Teral – Exec Director of research at HIS Markit had this to say on CNBC Asia ‘Street Signs"

"So far no one has provided any physical evidence that there is a security threat"

He went onto say that if the US bans Huawei – which is the world's largest maker of switch gears for mobile phones and internet companies – the costs associated with that would be massive. To be fair – China denies any accusation that it spies on anyone (of course they do – just like Mark (Zuckerberg) and Sheryl (Sandberg) of Facebook fame did until it was proven that that wasn't true either) while also saying that they would reject any demand to disclose any confidential information on any of their customers. In addition the lack of any new trade headlines is causing the mkts to reconsider its latest surge. BoJ (Bank of Japan) Governor Huruhiko Karoda told his parliament that he stands ready to ‘ease if required' and this helped the Nikkei buck the negative trend. Japan +0.20%, Hong Kong – 0.42%, China – 0.18% and ASX + 0.28%.

In Europe this morning – the mkts are taking their cue from Asia – beginning the day on a weaker tone as they await more trade talk headlines....in fact Auto makers in the EU came under pressure after it was revealed that Donny is considering tariffs on imported European vehicles - to which the EU vowed ‘prompt retaliation' if that were to happen – apparently gearing up for a fight if he were to pick one. Banks also under a bit of pressure after the ECB (European Central Bank) hinted at being a bit more dovish if need be – suggesting that the EU economy is beginning to stall due to a slowdown in China as well as uncertainty over the March 29th BREXIT event. German ZEW Survey for February falls to a 4 year low – not helping the mood at all. FTSE -0.42%, CAC 40 – 0.27%, DAX +0.05%, EUROSTOXX -0.29%, SPAIN -0.36% and ITALY -0.55%.

US Futures were trading around the flat line – but have now gotten a bit weaker - currently off 6 pts in early morning hours as we prepare for the start of the day. The talks have now moved back to DC and will begin anew today with ‘higher level talks' at weeks end. The latest jab at China over the cybersecurity issue is not helping the mood at all as the world prepares to roll out 5G service in 2020. (5G is the term used to describe the next generation of mobile networks and is expected to run at 20g/bps or faster with latency in the mere milliseconds. Suffice it to say that 20 G/bps is fast but that is only until we get the next generation 6G).

Look for the S&P to find support at the trendline 2744. It appears that the tone today is one of consolidation as we await more trade data news....While the mkt is assuming that a deal is in the works and that an extension is all but done – anything that suggests differently will cause stocks to get hit – potentially hard. I do not expect that to happen- but I do expect some pullback after the surge last week. We remain in the 2745/2800 range for now.

There are no real eco data reports today – but later in the week watch for the FOMC mins – due tomorrow at 2 pm – doubtful that you will hear anything new. Durable Goods are due Thursday, Markit US Manf PMI, Services PMI and Composite PMI, Existing Home Sales are all due on Thursday as well. Friday brings us the Chicago Fed Survey.

Oil – continues to inch its way higher supported by OPEC cuts and sanctions on Iranian and Venezuelan crude. Yet expectations of a slowing global economy continue to simmer on the back burner. WTI is up 50 cts at $56.09/barrel as it prepares to challenge resistance at $57.65 – where I think it will fail unless we get a trade deal – then I suspect that the oil mkts will surge on what will be perceived as a bullish trend for global trade – removing any uncertainty over what's next. A surge up and thru $57.65 will see it test its long term resistance at $61.80.

Word just out that Sen Bernie Sanders has once again thrown his name into the ring for the WH in 2020. I can't wait to see how this all falls into place – it is fascinating to watch and the next 16 months is sure to be bruising for some.