Wait For The Reds Of Their Eyes


The market got choppy on the “trade war” worries. That is opening up some trading opportunities for about the next year.

Technical indicators are showing that we stand a good chance of seeing a big sell-off through next week, possibly heading as low as about 2600 on the S&P 500.

It is unlikely that we see the December lows this time around as there is no tax-loss selling and no significant hedge fund redemptions.

Look for bottom fishing prices on stocks in the Dividend 30 and Growth 30 focus lists out this weekend (I have added a “Support 1” column which signifies where to look for starter entries.) Also, look to buy the Invesco QQQ Trust (QQQ) around $160.

Intermediate Term Investment Thesis

My intermediate term thesis is pretty simple. Next year, especially after Q1, remember Q1 is when we get retirement plan inflows that prop up the markets, is when we should expect a major correction.

Simplified, there are two reasons I expect a major correction in 2020, #crash2020, to the $2200 range on the S&P 500: 

The first is that recession risk is rising. Free trade equals more trade equals economic growth. We are stunting trade and so are others. The harbinger of recession will be rising unemployment.

If the unemployment number rises to about 5%, that is when we should get very scared. While many people ignore their retirement plans for years, it is when they get laid off and have to pay the bills that those plans come into play for them. Many laid off folks cash in their 401(K) plans. That is significant selling pressure into the market. Fear that.

President Trump’s big gamble on trade had better pay off. As we’ve covered for a few months now, the “no-deal” vs “fake deal” debate is coming to a close. Either there is a deal this summer or there is no deal until after the elections next year, in my opinion.

The next big reason to fear a sell-off next year is that big investors with appreciated assets that will be looking to sell for fear that their tax rates will go up if the Democrats take the Presidency and Congress (I put the Democrats taking the Presidency at 87%, House 94% and Senate 56%).

Much like the tax-loss selling at the end of 2018, locking in gains in 2020 could become the name of the game for big investors. That would be another headwind as we continue to run face first into mounting demographic and debt pressures.

Oil

I know this is painful, but oil stocks are oversold and should be bought if you haven’t yet. Saudi Arabia is continuing its cuts on production and U.S. oil companies are cutting back on drilling. Mergers and acquisitions are ramping up. Earnings are rising. Eventually, investor sentiment catches up with improving industry fundamentals.

Occidental Petroleum (OXY) just announced that they will be using more enhanced oil recovery and in fact, will be sucking carbon right out of the air as part of that process: Occidental To Remove CO2 From Air, Use It To Boost Oil Recovery In The Permian

Pioneer Resources (PXD) announced higher earnings and is cutting 25% of their labor to reduce costs. Other companies are similarly seeing increased revenues and earnings while reducing costs.

Fed Catalyst Of Ending QT

I complained loudly a year ago that Quantitative Tightening would be a drag on the economy and on stocks. We’ll, it looks like the Fed is going to end QT soon. How soon? It looks like September, though could be sooner, the Fed balance sheet actually increased a couple billion dollars last week. 

The impact of the Fed on share prices should be very apparent by now to everybody. When they restructured us out of the depession that we should have been in due to demographics, stocks went on a very long bull market. 

Next up is that $50 billion will no longer be taken out of the economy. While it’s not adding money, it’s money that will stay in the economy versus being taken out. That will have a positive impact on the economy and stocks, at least for a little while.