Morning Comment: Stocks Pricing-in Best Case Scenario (On Several Fronts)...June 26, 2019 - BTFNow

Poor day yesterday, but not a disaster.

When the stock market drops 1% on a given day, it usually raises a lot of concerns. However, yesterday’s 1% decline…after the big bounce we’ve seen this month…was hardly enough to raise serious questions about the recent rally. This is especially true since we have the meeting between President’s Trump & Xi later this week…….The decline came on higher volume than Monday’s, but at 2.9bn shares for the composite volume, it did not indicate an excessive increase in selling. Bedsides, breadth was only 3 to 1 negative on the S&P 500 and just 2 to 1 negative on the NYSE Composite. Those numbers pale in comparison to the ones we experienced in May or during the 4th quarter (which were 10 to 1….or worse). So this is another reason to think that even though the broad indexes fell 1% or more yesterday, it was not the kind of drop that should raise serious concerns…at least not yet.

Is Mnuchin's telling us the can will be kicked down the road on trade?

This morning, the futures are bouncing-back on comments from Treasury Secretary Mnuchin that a trade deal is 90% done. Of course, he said it was 90% done in early May, but the fact that a senior Administration official is saying things like this raises the odds that something constructive will come out this weekend’s meeting between the two leaders……..There is no way, in my opinion, that China is going to give in to the U.S. demands on the issues of intellectual property, technology transfer, verification this weekend…at least not to the degree the White House would like. However, Mr. Mnuchin’s comments DO raise the odds that both sides will claim that “enough progress” has been made to avoid a situation where the next round of tariffs by the U.S. are implemented.

Only good news is being priced-in right now.

Ok, then what? Will this be enough to keep the June rally moving higher…and take the stock market to new highs (well above their all-time highs from January 2018, September 2018 and April 2019)? In other words, we have to ask whether the stock market is really pricing-in a situation where the new (higher) tariffs will indeed be implemented? With the S&P standing so close to its all-time highs…at a time where the economy is slowing, future earnings estimates are falling, and valuations are some-what stretched…it’s hard to argue that the stock market is pricing-in anything but a positive outcome to this weekend’s meeting. That doesn’t mean that the stock market cannot rally further if the two countries kick-the-can-down-the-road, but it’s frequently essential to look at what the market has been doing just before an important event takes place…when trying to determine what will happen after the results of that event become known. In this case, the best case scenario…on several fronts…is already being priced-in to the stock market, IMHO.

FDX needs to hold the $152 support level.

With this all-important meeting coming up this weekend, every little tweet or comment can and will move the market. We certainly saw that yesterday…with the decline after some slightly more hawkish comments out of St. Louis Fed President Bullard & Fed Chairman Powell. The same is true this morning…with Mr. Mnuchin’s comments. Therefore, there is not a whole lot I can add to what’s going on in the broad market until after this weekend. With this in mind, I thought we’d talk about the technical condition of a stock that is getting very close to a key technical level.

Given how much we’ve harped on the Transportation stocks recently, I thought I’d look at the chart on one name that has been in the news a lot lately…and who reported earnings last night. The stock I'm referring to is Federal Express (FDX). They reported better-than-expected earnings last night, but also highlighted some headwinds they will face in their 2020 fiscal year. The stock is trading almost 2% higher in pre-market trading. This is helpful…because the stock is getting very close to a crucially important support level.

More specifically, FDX is now very close to testing its lows from both late December and early June of $152. This line is not only a “double-bottom”, but it’s also the lower line of a “descending triangle” pattern. Actually, this 152 level is especially important…because it is ALSO where the trend-line going all the way back to the 2009 lows comes in!!! Therefore, any meaningful break below $152 is going to be very harmful to this stock on a technical basis…and would make it quite vulnerable to a decline down to its 2016 lows of $123 (which is also a Fibonacci 61.8% retracement of the entire 2009-2018 rally). Therefore, if this earnings-related bounce does not hold…and the stock rolls over and takes-out this vitally important support level…it’s going to have even more (significant) downside potential.

FDX is not the same kind of bell whether for the economy is once was…due to the “Amazonization” of the economy…and the break-down of the relationship between the two companies (not to mention the lawsuit FDX has filed against the government). However, it’s still an economically sensitive company…and even though any break-down in this stock (if it eventually takes place) won’t have the same implications for the economy & the market going forward…it could/should still be an important development. This is especially true given yesterday’s much weaker-than-expected consumer confidence data.

Posted to The Maley Report on Jun 26, 2019 — 8:06 AM
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