“When the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.”
…Marty Schwartz, as interviewed in Market Wizards by Jack D. Schwager
We have extoled the investing virtues contained within the Market Wizards series by Jack Schwager before, and we continue to find relevant pieces of wisdom in the books’ pages despite the market events chronicled in the original volume taking place more than 30 years ago now. One particular quote that has stuck with us comes from the interview with “champion trader” Marty Schwartz, when he discusses finding signals in how the markets react to news. Specifically, Schwartz said, “When the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.” We were reminded of this insight on Wednesday when the stock market reacted much better than we expected to the news of Gary Cohn’s departure from the Trump camp. His resignation was not a complete shock, of course, but the fact that stocks appeared to shrug off the development at a time when uncertainty was already high is a promising sign. What’s more, riskier assets like small cap stocks, biotechnology, and the semiconductors were some of the best performers during that session, which is not what one would expect if the market was unhealthy.
It is also commonly said that happiness equals reality minus expectations, but many moves in the market follow that same formula. If expectations get too high, it is tough to exceed them and investors often end up disappointed. Conversely, if everyone is expecting the worst and thing turn out to be not as bad, it can set stocks up for a very pleasant surprise. Coming into 2018, the bar was probably placed too high considering almost 60% of respondents to the weekly AAII Sentiment survey were bullish on the stock market, the highest level since late 2010 and far above the 38.5% average going back to 1987. Now, though, a month after a 10% correction in most world indices and with fears about a global trade war escalating, the bullish expectations have plummeted to only 26.4% after their biggest two-week decline since 2013.
We also talked in Wednesday’s Charts of the Week about the extremely negative headlines we have seen recently, and yesterday some worried clients and advisors sent us two more from Gluskin Sheff’s chief strategist and JP Morgan’s co-president warning of possible 20% and 40% market collapses, respectively. To repeat what we said Wednesday, we’re finding few, if any, opinions out there that stocks are headed higher, which may sound like a bad thing but to us just means that expectations are low and the wall of worry the secular bull market has climbed the last few years remains in place. Hopefully, that will set stocks up for a chance to surprise to the upside.
Yesterday was a mix of good and bad news after hours as it was announced that President Trump would sign proclamations officially imposing the steel and aluminum tariffs that have been the hot topic of debate lately. Many investors have worried that such tariffs are the opening salvo to a more extensive global trade war that could disrupt the synchronized economic expansion enjoyed over the last year, but the signed proclamations were not as restrictive as originally feared when the idea of tariffs was first floated. Both Canada and Mexico, the largest and fourth largest steel provider to the U.S., respectively, will initially be exempt, and other countries with a security relationship with the U.S. will be able to petition for “alternative ways to address the impairment of our steel and aluminum industries” according to a senior Trump administration official. After hours stock index futures were positive following the announcement and this morning they remain about flat in anticipation of the 8:30 a.m. jobs report. There will be quite a bit of focus on this release, particularly on the average hourly earnings, which grew at their highest y/y pace since 2009 in January, setting off inflation alarm bells.
The S&P 500 stopped right at the 50-day moving average mentioned in yesterday’s report and will try to make another attempt to overcome it today (~2739). The index remains range-bound and contained within a symmetrical triangle pattern, but, to reiterate, there are some positive signs under the surface that make us hopeful the current consolidation will eventually be resolved to the upside. There was also progress on the geopolitical front yesterday when the news broke that President Trump will meet with North Korea’s Kim Jong-un by May and that North Korea will refrain from further nuclear or missile tests. So, there’s a lot going on to keep an investor occupied, but with expectations low and concern high, it is possible that it will take a worst case scenario to produce the kind of significant drops that many are predicting.
