Will the Grinch Steal the Christmas Rally?

Stocks ended the week on a slightly negative note as traders, analysts, investors and strategists all digested the latest moves by the FED and both the positives and negatives that multiple rate hikes may mean for the mkt going forward.  Now while the mkt has held up incredibly well since the FED's announcement - it does leave us to wonder whether or not the Santa Claus rally (also known as the Trump rally) will soon be replaced by the Grinch (who stole Christmas).

Now while there are so many ways to arrive a valuations for stocks and the broader mkt - the one way that so many analysts/investors agree on is the Relative Strength Index (RSI).  The RSI is a momentum index - "it compares the magnitude of recent gains and losses over a specified time period to measure the speed and change of price movements" (Investopedia).  The index moves between 0 and 100 and is considered overbought (overvalued) when it moves to greater than 70 and is considered oversold (undervalued) when it moves below 30.  So those are the numbers to watch......so what do we know?

We know that the RSI was registering between 75 - 77 during the week last week - (suggesting overbought) while ending the week at 67 as the mkt came under some selling pressure on both Thursday and Friday.  And this my friends is (or could become) the problem.....It does feel like the mkt has gotten a bit ahead of itself and is due for some sort of correction (I prefer the word adjustment)  - because if you look at what happened to the broader mkt over the past decade - you will see a pattern that develops - a pattern that suggest lower prices ahead. 

In May 2007 the index hit a high of 74.....and by March of 2009 - the mkt lost 55% of its value......In November 2010 - the index hit a high of 77 - while the mkt churned and finally failed - falling 20% by October 2011 - where is signaled a big oversold condition providing a huge opportunity for those with the guts to jump in as it rallied 88% over the next 4 yrs......By November 2015 - the index was kissing 70 again and by February of 2016 the mkt had given back just about 10%..... - now these are just examples.....there is nothing saying that a reading above 70 produces an immediate reaction or 'adjustment' - but what it does tell us is that it does act as a precursor for a coming correction - I'm just sayin.....

Considering the fact that the mkt has had such an explosive move since the election -  pricing in perfection on so many levels - this indicator is only telling us that the mkt is currently overvalued and the risk of a correction is high vs. not.  It is sending a warning signal about what could come in the new year.....and with the FED suggesting multiple rate hikes in 2017, 2018 & 2019.....it does make some sense that a 're-pricing' is in the cards if 'perfection' is not achieved....and we are now beginning to see pullback from the longer term Republicans that have much to lose if Trump succeeds in 'draining the swamp'.  In my opinion - the Grinch won't show up until after the ball drops on Times Square.......

Look - the FED (and every other central bank around the world)  has completely supported the mkts for 9 yrs now......(think zero to negative interest rates and helicopter money) - so as the talk moves to normalization of rates (at least in the US) then we must be prepared for all that that means....stronger dollar, higher bond yields, higher mortgage rates, and higher general consumer revolving credit rates.....lower commodity prices (think inverse relationship with a strong dollar) but rising oil prices in contrast because the OPEC and some NON-OPEC producers are CUTTING production as they try to force oil prices higher to save their backsides.....and the question here is - Will they succeed or will the US, Canada, China and Brazil take advantage of this situation?  (YES).

US companies have reported 6 qtrs of negative earnings - yet the mkt has continued to rally - in defiance of logic - as the Obama administration has used this faux move as a sign of real economic growth....Now - the 3rd Qtr of 2016 broke that trend - as earnings showed a slight y/y growth rate (as so many companies continue to CUT and automate) ....so what will the 4th Qtr show in January?  And will those positive earnings be enough to override the 'normalization'   of interest rates? 

Ok - so this morning we have European mkts mixed .....as we enter a usually quiet week.   Deutsche Bank is in the news again....falling some 2% after they paid $37 mil to END the gov't investigation into their DARK POOL routing technology admitting that they 'mislead traders about how they ranked the trading venues'.....but this is not the biggie investigation still going on - in the role they played in the mortgage crisis.....that settlement is still being negotiated....I would be remiss though if I did not point out that DB stock is up a stunning 77% since the September lows of $11 - as investors seem to be putting this future settlement aside as they look to the future of European banking.....FTSE +0.13%, CAC 40 -0.16%,  DAX  - FLAT, EUROSTOXX -0.08%, SPAIN -0.29% and ITALY + 0.15%.

US futures are +3 pts as the rally attempts to take control again after last week's quadruple witching (option expiry and rebalancing).  Traders are still betting on Dow 20K before year end.....It was a relatively quiet weekend of news - other than the Trump/China drama and the Russian hacking drama....- this morning the mkts do not seem to be paying much attention to either.....The key event for today is Janet Yellen’s speech at 1:30 p.m.

The topic of the speech “The State of the Jobs Market” is sure to garner a lot of attention in an otherwise quiet session..... so her comments will definitely have the potential to move markets - If she continues to be more “hawkish” as she was in her press conference last week then look for bond yields and the Dollar Index (DXY) to rise and this will HIT stocks - how hard depends on how hard she pushes....

The DXY is currently off 3 cts.....Oil is flat and Gold is up $2 as it tries to bounce off of last week's low of $1128/oz.... There are two eco data reports today - Markit Services PMI - exp of 55.2 and Market US composite PMI - exp range from 54.2 - 55.5 - but in my opinion - neither of these will be the catalyst for any move today....it will be all about what Janet says and how she says it.....Other than that - we can expect volumes and action to become more subdued as we move into the week as so many people around the world prepare for the holidays.

Take Good care 

KP

Christmas Prime Rib

Now - on Christmas eve as you know - we eat the 7 fishes and on Christmas day - we enjoy the classic prime rib....Prime rib is easy to make - as long as you don't overcook it.....so make sure you have a good meat thermometer....

I am featuring this today for Jeanne from Osterville, Ma - Osterville is a beautiful community along the Cape Cod shoreline.....Jeanne is a friend and an avid Morning Thoughts reader.....and she loves the Prime Rib Recipe.  Merry Christmas Jeanne !   I hope you enjoy.

For this you need:
1 - 10 lb Prime Rib, sliced garlic, S&P, and some thyme.

In a small bowl mix the garlic, olive oil, s&p and thyme.

Begin by putting the roast in the roasting pan - fatty side up.  Now rub the roast - including the fatty side - with your mix. - Be sure to massage it well so that it is all seasoned.  Set it aside and let it come to room temp.

Preheat your oven to 500 degrees - when ready place the roast in the oven and 'roast it' for about 15 - 20 mins.....- then reduce the temp to 325 - and cook for about another hour or hour and half.....- You will know when it is done when the internal temp reads 135 - this should produce a beautiful med rare roast. 

Remove it - tent it with foil and let it rest for 15 mins before you carve it. 

Serve this with sour cream mashed potatoes, sautéed peas and mushrooms and a large salad.   Enjoy with a nice bottle of Brunello di Montalcino..... 

 
Buon Appetito.