China Dealings, Global Trade, Updating 4 Stocks, Trading Apple: Market Recon

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Oh sure. I know. It felt awful. In fact, it was awful… in spots, certainly across tech, across a diverse array of industrial type names. Truth be told, I would have expected worse. Was equity weakness on Monday born of softer macro? Trade tensions? Profit taking? The answer is “yes.” Investors already knew that nationally, manufacturing (representing 12% of the economy) has been in a persistent state of recession. The ISM number disappointed, but shocked not one soul. October Construction Spending? That one was a rather nasty miss, not to mention the September revision that makes one wonder just why the Census Bureau releases preliminary data in the first place. I mean, if you are not up to the task at hand, why not wait until the numbers are fully developed? Makes sense to anyone else?

The real story from my desk, as I stare out a blackened office window (softened by the glow of early season snow) at zero dark-thirty on Tuesday morning, is this: The Monday equity beat-down should have been worse. (It still may be.) In fact, the selloff would have been worse, if those behind the curtain truly believed. Believed what? Believed that trade negotiations with China or with the rest of the world are melting down. Obviously, should a Phase One trade deal not be agreed to in short order, the semiconductors are overpriced, the Transports are overpriced. Materials type names such as chemicals, and/or packaging would be overpriced. The gorilla sized profits are in software, consumer finance, and communications. This is where there will be blood on the floor, should the narrative not improve. The president early this morning did not sound optimistic.

So, yes… the broad U.S. equity indices did give up about a percent across the board, Yes, trading volume increased from holiday levels, but was not heavy by any stretch of the imagination. Trading volume at both of New York’s two exchanges remained below last Monday’s levels for comparison. For those that, like myself, follow index specific volume, the only major index that saw the day’s volume rise well above it’s own 50 day SMA was the Nasdaq Composite. That would indicate that perhaps the selling across the tech space had some mustard behind it, yet even that fact is somewhat negated by the failure of volume across the Nasdaq 100 to reach that level. Losers beat winners at both exchanges by better than two to one. Equity index futures are heavy this morning. Stay nimble? Easily said.

Negotiation

Ever manage money or people? Ever buy anything expensive? Of course you have. Pay sticker price? Of course not. You play head games with the salesperson. Heck, it’s fun. That’s what’s going on here. I am sorry, but when I hear some of the simplistic explanations offered up in the financial media for what news reaches the headline level, my patience runs very short. I don’t know if it’s just a lack of preparation, or for some of those at the bigger firms, forced to respond with legal department edited answers to questions that have been telegraphed ahead by request, but we have to dig deep here. What’s really going on?

Does it tick the President off that it appears the Chinese would rather not give up in writing any unfair advantages in global trade that they have enjoyed for decades this close to a national election in the U.S.? Of course. The Chinese know that past U.S. presidents from both sides of the aisle have consistently backed down from short-term pain (not to mention the mantle of leadership) as a means toward correcting long-term policy.

Does it also tick the President off that the Argentine peso and the Brazilian real are now considerably lower relative to the U.S. dollar than earlier this year? Perhaps. Do these two nations export a lot of steel to the U.S.? No, though this is a growing industry for Brazil. What these two nations do export is agricultural products. To China. They are competitors. Got it? We’re in a stinkin’ fight, sports fans. So fight.

Across grains, across meats for what is the planet’s largest purchaser. As negotiations with China seem to bog down yet again, the administration is forced to let sellers (who need to drive revenue) of beef, of soybeans know that there is a price to pay at home for competing head to head elsewhere.

Think about it. I’m so fired up, I need to do push-ups. Be right back.

There’s More

Now, the Trump administration also reveals a plan to impose 100% tariffs on imported French goods. This comes after an investigation into a French digital services tax determined that the tax unfairly targets U.S. tech companies. The U.S. trade representative also infers that perhaps tariffs could be implemented on imported French services as well as goods. Keep in mind that this kind of retaliation by the U.S. could also place Italy, Austria and Turkey in the crosshairs as those nations have taxed digital services.

The reasons why this is key are twofold. One, the President is currently in Europe for the 70th anniversary of the NATO alliance. Clearly, though the administration has been able to get NATO member nations to contribute more toward their own self defense than they have in the past, the majority still avoid paying what might be considered anything even close to their fair share.

Second, with the Bureau of Economic Analysis set to report October data for the national balance of trade this Thursday morning, it has become painfully obvious that while the goods specific data has continued to run a sizable deficit, that the U.S. surplus in services based data has been dwindling. This is beyond simply being important. This is the U.S. economy’s bread and butter. While the U.S. long ago began to export production, and with it … middle class incomes (hence the earlier mantle of leadership comment, hence the current state of income inequality), the U.S. had long remained the dominant global player in the trade of services. For the record, as reported on Monday at the Wall Street Journal’s website, year to date through September, imports of services have grown 5.5%, compressing the nine month surplus by roughly 10% comparable to 2018 performance.

Remember what I wrote to you on Monday in my Real Money piece.. that Amazon (AMZN) is forced by increasing competition to endure expense in order to defend performance? Same here. This administration, knowing that the manufacturing side of the economy is mired in decline, must defend, even at expense… where there is desirable strength. The planet is more immediate, more connected. That will not change. Other breadbasket nations, even those considered to be emerging or frontier economies can compete agriculturally on a global level. Other developed economies that are not forced to divert domestic fiscal spending toward their own self defense can compete better in the global trade of services, especially technology based services. Now, how exponentially would the impact of such competition be upon the global leader in services based trade, if that same leader were also forced to support the national defense of said competitor?

Now, you do get it, don’t you, sport?

Update On Monday’s Equity Notes

It appears that along with the selling, that Adobe Systems (ADBE) , Mastercard (MA) , and Merck (MRK) all hit turbulence at the levels discussed. At least the Nvidia (NVDA) sale proved prudent for now.

Among those names, Merck remains in contact with pivot. That little battle has not yet been won or lost. Mastercard was a bit ugly, and will likely participate in a broad market selloff.

However, this downturn in Adobe ahead of earnings (Dec. 12) could be just what the doctor ordered. Yes, the cloud will be hit as net fund flows turn against tech, but my thinking here is that this could be the very beginning of this stock adding a handle to the cup pattern (discussed yesterday) already in place. If you’re scared, sell some. Nothing wrong with that when there are profits to protect. I’m not selling any, unless it gets real ugly.

What About Apple?

For those that do not follow my every move, I cleared out the last tranche of my Apple (AAPL) long back on November 19th. It was a good out, Still is. Heck, the stock had kept hitting target, and while I know that it is often unwise to trade Apple instead of just owning it, I am a old-fashioned gunslinger at heart. It is my nature to test my skill. If I do not end up buying these shares back cheaper than I sold them, the fault is mine, for the opportunity is there right now. Can I do better though? I think I can, but let’s make one thing clear… I do want Apple in my portfolio, and if the challenge of beating the charts is not something relished, then Jim is indeed correct, own it, don’t trade it.

That said, I’d rather lose a fight to a dinosaur than admit that the dinosaur could take me. So, let’s dance. In like this Chatterjee fellow over at JP Morgan. Chatterjee has been seriously accurate with his calls on this name. On Monday, he reiterated his rating of “overweight” on AAPL while increasing his target price from $290 to $296. Chatterjee seems excited about Apple’s 2020/2021 iPhone cycle, citing the expectation of a September launch for three 5G wireless capable iPhone models as well as a fourth, lower cost model. Me? I may buy the cheap model once it is out of date, but that’s just me. The stock is my interest, not bells, not whistles, and certainly not staying connected.

I really think the services side is where future increases in valuation metrics will come from for these shares that still incredibly trade at a forward looking PE ratio in line with the broader S&P 500. Chatterjee was not the only well known analyst to opine on Apple on Monday. The very highly rated Daniel Ives (Five Stars) at Wedbush seemed quite optimistic concerning holiday season demand for AirPods, and even brought up the potential for a seasonal “shortage.” Ives rates AAPL as “Outperform” with a price target of $325.

At least, the daily MACD bearish crossover took the name’s reading for Relative Strength out of overbought territory. Money Flow is still strong. The Pitchfork’s lower trend line support clearly has not broken. Where would I love to reinvest in this name? In all honesty, the $245 level is where the 50 day SMA currently resides.

The fact is, even in a done tape, even with negative trade headlines, I will need to see the shares test that trend line. For today. that means $258-ish, but unless that line cracks, the price goes up every day. $257.50 December 20th puts seem interesting, paying $2.60 on the way out on Monday night. They’ll likely pay more than that at the Tuesday open.

Tuesday Night

The point of market interest on Tuesday evening will come from the likes of Marvell Technology (MRVL) . These shares have sold off ahead of these earnings,and the earnings will be important, but what they say about the aggression, or lack thereof about broad business expenditure into the 5G wireless revolution will echo across the semiconductor/telecom space.

Economics (All Times Eastern)

08:55 – Redbook (Weekly): Last 4.3% y/y.

16:30 – API Oil Inventories (Weekly): Last +3.639M.

The Fed (All Times Eastern)

No scheduled public events.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: (DCI) (.53)

After the Close: (MRVL) (.17), (CRM) (.66), (WDAY) (.37), (ZS) (.01)

(Amazon, Mastercard, Nvidia, Apple, Marvell and Salesforce are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)