Keep an eye on Retail Sector

Seems incredible, due to its past performance struggling an entire year, but now the retail sector could fuel the next bullish rally on Wall Street if it happens. You know, essentially, retail sales cover the durables and nondurables portions of consumer spending. And consumer spending typically accounts for about two-thirds of GDP and is, therefore, a key element in economic growth. And Wall Street stocks love strong economic growth, best if it comes without excessive inflation as the current environment.

Now, some of its main and iconical stores had great earnings this season, beginning last week with Walmart WMT, and continuing this week with Home Depot HD, Target TGT, and Lowe LOW. The ETF that follows this sector (XRT) hit historical lows past week, but after those company results, and also a nice Retail Sales July report, a buy-the-dip trade here isn't a bad idea now

Check below the highlights: all major readings easily surpass the consensus.  More: the non-stores sub-sector monthly sales jumped 2.8 percent following gains of 1.9 and 2.3 percent in the two prior months. This component is dominated by e-commerce which is making increasingly greater gains at the expense of brick-and-mortar stores. Department stores have been one of the victims (remember Sears last year) but not in July with a 1.2 percent sales jump. 

Is a turn next in the retail sector? It's likely. And if Trump is considering tax cuts in payrolls or capital gains, and then approves them, due to its reelection, the sector XRT could explode.
Probably the best Retail Sales report of the year. Could a turn is next in this sector?

Technically, the price was at a low at $37.46 last week, below the up trendline that acts as a year-support. With all the year ranging (its ADX is below 20) between $40 and $46, now finally the retail sector show some positive feelings that could raise its price, first above its uptrendline support at $40.30, and then above its moving averages (specially the SMA200 at $44) that would be decisive to reaffirm a bullish bias in this ETF. Now its price is recovering due to reports and earnings mentioned above. The bullish signal would be given by the cross in the MACD line. So, after Jackson Hole decisions, an entry long in the short-term in this sector could be a profitable trade.

Charts helps, but I always check first the fundamentals and news before a trade, and this week the FOMC and Jackson Hole are decisive before making any trade. Management risk is the key.

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Today Retail Earnings take pressure off the Fed

When Jackson Hole was becoming an obsession for Wall Street, this week’s retail earnings come to calm the waters and tell the market that the U.S. economy probably isn't cooling as hard and fast as it is believed. It's well known that the Trade War without solution, the inverted yield curve, the fall in the yield of bonds globally (see graph) and, the threat of recession are factors that should scare any economy and regardless, the US consumer sector, key in every economy, seems to flow well. 

Yesterday Home Depot HD was up 4% after good Q2 results reaffirming its guidance for this year. And today, at premarket, Target TGT exploits more than 18% after beat EPS and sales with a wide margin, with raises forecast and reaching all-time highs.The same happen today with Lowe LOW (+ 12%) another great retail chain, beats EPS and sales and affirms guidance. 

The next data of Housing this week can reaffirm this perception of the US economy. Finally the Fed now has less pressure (except Trump's tweets) to lower rates and this can be seen today that the FOMC Minutes begin and Friday with Powell in Jackson Hole.

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JPMorgan: stocks could see inflows and outperformance into month-end

JPMorgan's Marko Kolanovic said investors are questioning how much of recent equity moves can be attributed to increased recession risk vs. technical flows in this environment of poor liquidity.

JPM's analysts have reasoned that more than half of the recent move in interest rates and inversion of the yield curve was caused by technical drivers (convexity hedging of mortgages, bank portfolios, and variable annuities in poor liquidity conditions) and less than half of the move can be explained by fundamentals such as the growth, inflation, and monetary policy outlook. "This is an important data point for equity investors, as moves in rates (e.g. yield curve inversion) significantly impact investment sentiment," 

Marko wrote, "by looking at various systematic flows in equity markets, we find similar results – i.e. that more than half of equity moves were driven by systematic rather than fundamental trading."Looking at systematic equity flows during (and as a result of) the Wednesday 14th August sell-off, JPMorgan estimates that around USD 75bln of programmatic selling, with around 50% of it coming from index option delta and gamma hedging, around 20% from trend-following strategies, around 15% from volatility targeting strategies, and the remaining 15% from other products (e.g. levered/inverse ETFs, etc.). "While these outflows would have represented about 25% of futures daily volume, in an environment of low liquidity they can be a dominant driver of price action," Marko says, noting that in particular, during August, market depth of S&P 500 futures dropped to near all-time lows. "Within one index point on the S&P 500 (from mid-market), on average there were just around 900 e-mini futures contracts bid/offered – i.e. an approximately USD 130mln sell order could have moved the market by ~1 index point. We estimate that S&P 500 index option hedging flows were likely the single most important driver of price action during both the selloffs and rallies last week.

"What is the current investor positioning, and what type of flows can we expect going forward? "Hedge fund equity beta is currently near all-time lows, in its quarter-percentile. Trend following strategies and volatility targeting strategies also have low exposure, both in their respective 27th percentiles. All else being equal, such low positioning is positive for equity performance going forward," Marko says, adding that "low positioning also reflects negative market sentiment, with the past two readings of the AAII Bull-Bear spread at -22% and -27%, not far from the lows seen in Dec’18 (-28%) and Feb’16 (-29%) that both marked market bottoms."Marko says that equity flows will, to a large extent, be driven by developments around trade, and hence the market will likely continue to be dominated by market disruptive tweets and announcements related to the trade war, which are difficult to foresee. 

On the positive side, Marko says JPM is expecting some stabilization in market volatility as dealers’ gamma positioning is now close to neutral (from a sizable short position last week), and this may reduce volatility and marginally improve liquidity."JPMorgan also expects some marginal stabilization, and perhaps a reversal of volatility targeting outflows. "Given the large outperformance of bonds over equities this month, equity inflows are likely to occur next week," noting that it had recently discussed fixed-weight trigger rebalances may have cushioned the market selloff even before calendar month-end (given the large divergence between stock and bond prices), but typically portfolio rebalances happen at month- or quarter-end, "Marko says that even after the stock market recovered some of the losses from last week, we could still see equity inflows and outperformance into month-end. "Bonds delivered their strongest performance in over seven years and are up around 5% MTD, and equities are down around 2% MTD," adding that as things stand, "this performance divergence leaves fixed-weight portfolios around 2% underweight equities, and suggests they are likely to do a sizeable rotation out of bonds and into equities into month-end."JPM's model suggests that these flows could drive a further 1.5% to 2% of outperformance for equities next week - this figure could change, the bank notes based on this week’s performance of stocks and bonds.

(Taken from JPMorgan strategist, Marko Kolanovic conference call, today )

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Trump pressures the Fed again

Given that a definitive trade agreement with China, and the end of the Trade War, is more complicated than ever (moreover, I see it impossible to realize this year), Trump heads his weapons to 'the real enemy at home', as said with those words: the Fed. 

Today, as he is now a reliable economist (its mention of "the crazy inverted yield curve" was really hilarious), "suggested" urgent decisions: a rate cut of 100 bps (!!)  and also a Quantitative easing. He does not ask little. I agree with him that their economy is the best in the world, but that fact must be endorsed with good economic policies, which I believe the Fed has been doing until today, without taking care the usual aggressive tweets from the President.

Is sure Powell knows he needs to steepen the yield curve and would lower rates next month (the 10-year T-Bond yield TNX is at historic lows, near 1.6%), but also he is evaluating the entire economic environment. The U.S. consumer sentiment of the economy is doing fine, as shown last Walmart WMT earnings (taking usually as a benchmark of U.S. consumer spending) and also the good Retail Sales numbers for July. In the other side, the industrial production isn't doing so well, as it last report shows. And now is a trending in the global economy (Japan and Eurozone mainly) the negative interest rates for the bonds, a crazy situation in which we are paying a bank for saving our money. 

Complicated panorama. So a good idea would be to check the Housing data this week (Existing Home Sales on Wednesday) and New Home Sales on Friday. This could clarify if the recession is really here or just in the yield curve inversion chart.

World economic calendar for this week, taken from 
FOMC Minutes and Housing reports would drive the markets.

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SP500 technical levels to follow in the short-term

A quick analysis to the daily chart of the SP500 (not shown) reveals its two main levels to check for the next sessions: as support, the key SMA200 average at near 2,800, also a psychological level. And as resistance, the 61.8% of its Fibonacci (at 2949.25) of its last pullback from August, as this level is probably the most important and followed retracement view by traders and investors. So, in the recent volatile behavior, it could reach some of these levels soon.

Now SPX is touching the 50% retracement, and overbought, with Stochastic above 90. But informed traders know that the Stochastic could stay many days, or weeks, above the level 80 due as the greed that involved traders in that point. Not the same happens in low levels, below 30, where fear is the main sentiment with peaks as its main pattern if panic comes. The 1-hour chart above shows it more clear.

Fibonacci retracements are important to draw after a complete pullback because Wall Street use them heavily, been 61.8% its favorite support. Check how difficult is for the SPX to overcome it.

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