MCR Market Report

The Leader in Quantitative Analytics

The MCR Market Report has been publishing its quantitatively-driven trading models for financial markets since 2011. Clients of our research include international research firms, portfolio managers, and mutual fund companies.  In all markets, we believe that buying shortly after the beginning of an uptrend, and selling at the first sign of a downtrend is a far more desirable method to profit in any of our covered instruments, than simply buying and holding.  Our mission is to achieve superior returns over buy-and-hold, while managing risk and avoiding excessive drawdowns.  The MCR Market Report is the premier publication for investors in the most widely traded financial markets.

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  • 28 January 2019 4:37 PM | MCR Market Report (Administrator)

    For the holiday-shortened week, after four weeks of solid gains the major benchmarks ended the week flat.  The Dow Jones Industrial Average added just 30 points last week ending the week at 24,737, a gain of 0.1%.  The technology-heavy NASDAQ Composite rose 7 points, also up 0.1%.  By market cap, the large cap S&P 500 finished down -0.2%, while the mid cap S&P 400 rose 0.1% and the small cap Russell 2000 remained unchanged.

    In international markets, Canada’s TSX rose 0.4%, while the United Kingdom’s FTSE 100 finished down -2.3%.  Major markets on Europe’s mainland finished the week in the green with France’s CAC 40 adding 1%, while Germany’s DAX and Italy’s Milan FTSE adding 0.7% and 0.5%, respectively.  In Asia, China’s Shanghai Composite rose 0.2% and Japan’s Nikkei added 0.5%.  As grouped by Morgan Stanley Capital International, emerging markets rose 1.6%, while developed markets finished up just 0.1%.

    Precious metals bounced back this week with Gold rising 1.2%, or $15.50 to finish the week at $1298.10 per ounce.  Likewise, Silver rose 1.95% to finish the week at $15.70 per ounce.  Oil took a break after three weeks of solid gains finishing the week down -0.65% at $53.69 per barrel.  The industrial metal copper, seen by some analysts as a barometer of global economic health due to its variety of uses, rose for a third consecutive week up 0.4%.

    For the first time in over 50 years, the number of applicants for new unemployment benefits fell below 200,000.  The Labor Department reported initial jobless claims fell by 13,000 to 199,000 in the week ended January 19th.  The reading is the lowest it’s been since November 15, 1969 and underscores the strength of the U.S. labor market despite a government shutdown and global trade tensions.  The more stable monthly average of new claims fell by 5,500 to 215,000.  Continuing claims, which counts the number of people already receiving benefits, fell by 24,000 to 1.71 million.  That number is reported with a one-week delay.

    The number of existing homes sold in December slid to a three-year low last month, another sign that the housing market continues to cool.  The National Association of Realtors reported existing-home sales ran at a seasonally-adjusted annual rate of 4.99 million in December, down 6.4% for the month and 10.3% from the same time last year.  The reading was far below the consensus forecast of a 5.1 million selling pace.  The full-year sales tally for 2018 of 5.34 million homes sold made it the worst year since 2015 when the housing market was hit by a change in mortgage regulations.  In the details of the report, the available number of homes on the market also shrunk.  At the current sales pace, it would take 3.7 months to exhaust the available supply, down from 3.9 months in November.  Analysts generally consider a 6 months supply of homes on the market to be a “balanced” market.

    Research firm IHS/Markit reported its flash U.S. Manufacturing Purchasing Managers Index rebounded 1.1 points to 54.9 this month, its first increase in three months.  In the details, factory activity picked up at the start of the year, and output grew at its fastest rate since May of 2018.  New orders, employment, and inventory growth also accelerated.  However, in contrast, Markit’s flash Services PMI slipped 0.2 points to 54.2.  However, readings over 50 still indicate expansion.  Chris Williamson, chief business economist at IHS Markit stated in the release, “US businesses reported a solid start to 2019, with the rate of expansion running only slightly weaker than the average seen in the second half of last year.”

    Leading indicators for the U.S. pulled back in December suggesting slower growth ahead.  The Conference Board reported its Leading Economic Index fell 0.1% in December, its second decline in the final quarter of 2018.  Ataman Ozyildirim, director of economic research at the board stated, “The US LEI declined slightly in December and the recent moderation in the LEI suggests that the US economic growth rate may slow down this year.”  Furthermore, he added that the LEI now suggests that the economy could decelerate toward 2% growth by the end of 2019.  The reading was inline with consensus expectations. 

    Global Macro Strategist Jim Mylonas at BCA Research in Montreal released a note stating that Canada’s economy may soon endure something it hasn’t faced in 68 years—a recession without the U.S. in the same boat.  Mylonas says that a surge in Canadian household debt combined with rising interest rates will push the Canadian economy into recession, even while the U.S. economy continues to grow.  “I think we’re just on the precipice of embarking on a serious recession,” Mylonas said.  “It’s not a matter of if, but when.”  His reasoning is that surprisingly strong growth in the U.S. will the force the Federal Reserve and subsequently the Bank of Canada to raise interest rates.  Mylonas stated that the debt-laden Canadian consumer is ill-equipped to handle higher borrowing costs, unlike their U.S. counterparts who dialed back borrowing following the housing crash a decade ago.

    Across the Atlantic, Bank of England Governor Mark Carney stated that there is still little clarity on how the U.K. will leave the European Union this year, but his institution has been preparing for a so-called “hard Brexit” since the referendum vote back in 2016.  He said the bank's stress tests on what could happen in the event of a "hard Brexit," in which the U.K. leaves the EU on March 29 with no withdrawal agreement in place (and, crucially, no 21-month transition period), were part of its attempts to test the waters about what might happen.  In November, the BOE predicted should Brexit occur U.K. GDP would go down by 8%, commercial real estate would fall by 50% and house prices would decline by a third.  In addition, unemployment would rise to almost 9% while interest rates would have to go up.  The Bank of England was criticized for scaremongering by Brexiteers ahead of the 2016 referendum on whether to stay or leave the European Union with its predictions of economic harm in the event of a "leave" result labeled a part of "project fear."

    On Europe’s mainland, IHS/Markit’s measure of manufacturing and services activity in France dropped to 47.9—its lowest level in more than four years.  The reading was a significant miss.  The consensus forecast was for a rebound to 51.  Despite the poor reading, French Finance Minister Bruno Le Maire stated France will stick to its forecast for 2019 of 1.7% economic growth.  In addition, he stated he had broader plans to tax the world’s biggest internet and software companies and tackle the power of giant multinational corporations. 

    Europe’s economic powerhouse Germany is also facing headwinds as manufacturing activity slumped in the first reading of the year.  IHS/Markit reported its monthly index showed manufacturing activity in Germany contracted for the first time in four years.  The gauge fell to 49.9 from 51.5 with new orders falling at their sharpest pace since 2012.  The reading coincided with research firm Zew, which reported its assessment of the current economic situation in Germany plunged 17.7 points to 26.7, its lowest reading since January of 2015.  In the details of the report, the survey of German analysts indicated a slight improvement, but still negative, in sentiment with a 2.5-point rise to -15.  Achim Wambach, Zew president stated, “It is remarkable that the Zew economic sentiment for Germany has not deteriorated further given the large number of global economic risks.”

    In Asia, the Chinese economy grew at its slowest pace in 28 years last year, adding to the urgency for President Xi Jinping to reach a trade deal with the United States.  China announced that its official economic growth rate came in at 6.6% last year matching economists’ estimates.  Although the trade war is not the main reason for last year’s slowdown, it is not helping.  Andrew Collier, managing director of Orient Capital Research stated, “The economy is a much bigger problem for Xi Jinping than the trade war.  The last thing he wants is a bunch of angry people protesting because they’ve lost their jobs.”  Retail sales, industrial production and property sales all slowed in the final quarter of last year.  Car sales were particularly poor, recording the first annual drop in more than two decades.

    Japan’s prime minister Shinzo Abe said China’s slowing growth, concerns over Brexit, and U.S.-China trade disputes pose risks to the world economy.  In an environment of growing isolationism Abe announced his two “mega deals” in trade--the Trans-Pacific Partnership and the European Union-Japan Economic Partnership.  In addition, Abe said the World Trade Organization needs to be changed, calling for a trading system that protects intellectual property rights.  Analysts state it was a veiled reference to China, which the Trump administration and others say is cheating on trade rules and stealing intellectual property from Western companies.  "We have to make the WTO into a more credible existence.  We need to reform it,” Abe stated.

    Finally, if you have happened to take a cross-country road trip through middle America within the past 20 years, you’ve probably seen at least one of these in each of the towns you pass.  We’re talking about Walmart, the top private employer in over 20 states.  With over 3,500 Walmart Supercenters spread across the 50 states, Walmart has over 1.5 million “associates”.  Researchers at visualcapitalist.com created the graphic below to put the size of the Walmart empire into perspective. 

     

  • 22 December 2018 3:14 PM | MCR Market Report (Administrator)

    Our indicator has detected the market weakness that began back in late September when the number of stocks in the small cap Russell 2000 in bear markets outnumbered the number near their highs.  This was followed by the Nasdaq 100 and then ultimately the large cap S&P 500 which put up a valiant fight.  Going forward, we believe that until a meaningful bottom is established, any rallies will be short-lived and should be sold into.


  • 22 December 2018 2:58 PM | MCR Market Report (Administrator)

    Stocks suffered another week of steep losses bringing all the major benchmarks to their lowest levels in over a year.  The technology-heavy NASDAQ Composite fared the worst, joining the small-cap Russell 2000 and mid cap S&P 400 in bear market territory—down more than 20% from recent highs.  U.S. indexes caught up to the weakness in the rest of the world in a particularly brutal week of trading.  The Dow Jones Industrial Average plunged over 1,655 points to end the week at 22,445, a decline of almost 7%!  In addition, the NASDAQ Composite nose-dived -8.4% to 6,332.  By market cap, the S&P 400 mid cap index retreated -7.0%, while the large cap S&P 500 lost -7.1%.  The small cap Russell 2000 cratered -8.4%.

    Major international markets were also a sea of red.  Canada’s TSX ended down a third consecutive week losing -4.5%.  The United Kingdom’s FTSE retraced last week’s gain losing -1.8%, while France’s CAC 40 and Germany’s DAX gave up -3.3% and -2.1%, respectively.  In Asia, China’s Shanghai Composite retreated -3% and Japan’s Nikkei plunged -5.7%.  As grouped by Morgan Stanley Capital International, developed markets ended the week down -3.8%, while emerging markets finished down -1.8%.

    In commodities, the defensive nature of precious metals were bid amid the stock market weakness.  Gold rose $16.70, or 1.4%, closing at $1258.10 an ounce.  Silver added 0.4% rising to $14.70 an ounce.  Following a brief respite, oil continued its absolute plunge.  At the beginning of October crude oil had traded over $75 per barrel.  At this week’s close, West Texas Intermediate crude oil traded at $45.59, down -11% this week.  Copper, viewed as a barometer of global market health due to its wide variety of industrial uses, ended the week down -3.2%.

    The number of Americans seeking new unemployment benefits rose modestly last week after hitting a 3-month low.  The Labor Department reported initial jobless claims rose 8,000 to 214,000.  Economists had expected a rise to 218,000.  The number of claims remains far below the eight-month high of 235,000 hit a few weeks ago.  The four-week average of claims, smoothed to iron-out the weekly volatility, fell 2,750 to 222,000.  That number remains near its lowest level since 1973.

    Sales of existing homes increased a second month in November according to the National Association of Realtors.  The NAR reported existing home sales ran at a seasonally-adjusted 5.32 million pace last month, easily beating the consensus forecast of a 5.17 million rate.  Sales were 1.9% higher than in October, but down 7.0% from the same time last year.  In the report, homes were on the market for an average of 42 days up from 36 days in October.  By region, sales surged 7.2% in the Northeast and rose 5.5% in the Midwest.  Sales in the South ticked up 2.3%, while the West fell 6.3%.  Home prices were up 4.2% from a year ago hitting a median sales price of $257,700.

    Confidence among the nation’s home builders fell to its lowest level since May of 2015 as the housing market continues to slow.  The National Association of Home Builders’ monthly confidence index fell four points to 56.6 this month.  In the details of the report, the index measuring current sales conditions fell 6 points to 61, while the gauge of sales expectations over the next 6 months dropped 4 points.  The index of buyer traffic fell to its lowest level since March of 2016—down 2 points to 43.  In its statement, the NAHB blamed rising mortgage rates and high prices for the poor report. 

    Spending among the nation’s consumers rose 0.4% last month, matching expectations, led by recreational goods and vehicles.  Of concern, incomes rose just 0.2%, missing forecasts by 0.1%.  Inflation measured by the core Personal Consumption Expenditures reading (rumored to be the Federal Reserve’s preferred inflation gauge) ticked up to a 1.9% annual rate—its highest in three months.  That reading sits just below the Fed’s target of 2.0%.  Overall, the data points to a strong holiday shopping season, which should translate into a solid fourth-quarter gross domestic product reading. 

    Orders for goods expected to last at least three years, so-called ‘durable goods’, rose less than expected in November.  The Commerce Department reported orders rose 0.8% missing expectations of a 1.3% increase.  In addition, orders were led by aircraft where just a few orders can strongly affect the headline number.  Core business orders, which remove defense and aircraft spending, fell -0.6% and have been down three of the past four months.  Notably, machinery orders fell 1.7%, its first decline since March.  Electrical equipment and vehicle orders also fell.  Year-over-year, core business orders are down 4.0%, their slowest pace since March of last year.  That reading confirms a weaker capital expenditure trend.

    Manufacturing activity in the New York region slowed considerably this month according to the latest data from the New York Federal Reserve.  The New York Fed reported its Empire State manufacturing index fell 12.4 points to 10.9, its weakest level in over a year and a half.  Economists had expected a reading of 21.  There was weakness across the board in the report.  The new orders sub-index fell 5.9 points, while the shipments sub-index declined by 7 to 21.  Analysts blamed trade tensions with China and a stronger U.S. dollar for the weak report. 

    In Philadelphia, manufacturing activity remained subdued as the Philly Fed’s General Activity Index fell 3.5 points this month to 9.4—its lowest level since August of 2016.  The reading has been down four out of the past five months, as manufacturing growth has continued to moderate.  Economists had expected an increase of 2.1 points to 15.0.  Below the headline number, shipments rose at their slowest pace since September of 2016.  Inventories shrank and new orders and hiring picked up modestly. 

    Despite the wishes of President Donald Trump, the Federal Reserve raised its benchmark interest rate a quarter point to 2.25-2.50%.  While there was some good news for market bulls in their announcement--the Federal Reserve now anticipates just two more rate hikes in 2019 instead of the three it had originally planned, the Fed statement reiterated that further rate hikes were expected, a statement that surprised some economists.  Federal Reserve Chairman Jerome Powell stated “Policy at this point does not need to be accommodative—it can move to neutral.”  In a preview of 2019 he said the Fed expects “solid growth next year, declining unemployment and a healthy economy”. 

    Factory activity has led Canada to its fastest economic growth in five months according to Statistics Canada.  Canada’s gross domestic product grew 0.3% in October led by manufacturing, finance and insurance, and wholesale trade.  The reading exceeded analysts forecasts of a 0.2% rise.  Factory production rebounded 0.7% making up most of its losses over the previous two months, while wholesale trade climbed 1%.  This GDP report is the last one Bank of Canada policymakers will see before setting interest rates in early January.  After raising rates five times since mid-2017, Governor Stephen Poloz has said how soon he considers another rate increase will depend on fresh data and that he needs to assess the drag from a drop in Alberta oil prices. 

    Across the Atlantic, the Bank of England cut its growth forecast stating that uncertainty over the UK’s departure from the EU had “intensified considerably” over the past month.  Amid a backdrop of weaker global growth, the bank’s Monetary Policy Committee voted unanimously to hold interest rates at 0.75%.  Furthermore, the bank now expects the economy to grow by just 0.2% in the final quarter of 2018, down from an earlier forecast of 0.3%.  Analysts have stated that if there is a deal reached regarding Brexit, the Bank of England will likely raise rates quickly.  Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics stated, “We continue to think that the MPC won't wait for signs of a recovery to emerge in the data and will raise Bank Rate to 1.0% in May.”

    French statistics agency INSEE reported French economic growth should rebound early next year after violent anti-government protests and declining business confidence cut short a previously expected year-end recovery.  The eurozone’s second-largest economy is on course to grow only 0.2% in the final quarter of the year, down from 0.4% in the third.  INSEE had previously forecast growth of 0.4% in the final quarter, but cut its estimate after a proposed sharp hike in fuel taxes by President Macron sparked protests.  But even before the protests, business confidence had been deteriorating as global trade tensions continued to rise.

    Worries continue to grow about the strength of Germany, Europe’s economic engine, after a key indicator suggested fears over trade disputes and Brexit are impacting business activity.  The Ifo Institute reported its business confidence index dropped 0.9 point to 101.0 in December as managers’ views of both their current circumstances and their prospects for the next six months fell.  The reading was the fourth drop in a row and the lowest reading in over two years for the index.  Uncertainty over the economy is growing just as the European Central Bank announced that it will end its 2.6 billion euro ($3 billion USD) stimulus program.  The ECB says the economy is strong enough to halt the stimulus but is keeping other support measures, such as record-low interest rates in place. 

    In a policy shift that could help China withstand short-term shocks from its trade conflict with the United States, Chinese President Xi Jinping approved a combination of measures aimed at spurring investment and consumption.  They including allowing easier credit (especially to local governments) and expanding tax cuts.  The plan comes as China’s economy faces headwinds from weakening household spending, declining industrial output, and slumping factory investment.  The plan keeps risk control as a major task for 2019.  It also promises to use tax cuts on a greater scale and significantly increase the size of bond issuance by local governments, which have long been under Beijing’s scrutiny for running up debt.

    Japan’s economy is on track to equal its record postwar expansion streak with a 73rd consecutive month of growth, according to the government’s monthly economic report.  If confirmed, the current recovery will officially match the record set in the period from February 2002 to February 2008.  Economic and Fiscal Policy Minister Toshimitsu Motegi stated this “appears to be highly likely”.  The streak has been driven by a growing global economy which has fueled brisk exports and capital spending over the last several years.  The Bank of Japan’s monetary policy put downward pressure on the yen, making Japan’s exports more affordable and bolstering exporters profits.  The report cited "uncertainty in overseas economies" and "fluctuations in the financial and capital markets" as risk factors.  The U.S. and Japanese stock markets have seen steep downturns in recent months, and some analysts warn that world growth has passed its peak.

    Finally, after stocks suffered their worst week since 2008 pretty much everyone knows that stocks are struggling as of late.  But with each of the major indexes falling into bear market territory many are probably unaware of just how swiftly and severely individual stocks have been hit.  Many of Wall Street’s recent favorites are down—hard, with most of the FAANG stocks down anywhere from just over 20 to near 40%!  Research firm FactSet created the following graphic showing just how bad the carnage has been:


  • 23 October 2018 3:24 PM | MCR Market Report (Administrator)
    How quickly times change.  Just 14 days ago the S&P 500 was reaching new all-time highs, but all was not well beneath the surface.  We had been monitoring the fact that fewer and fewer stocks continued to participate in the uptrend (most notably technology and healthcare stocks).  However, the average stock in the S&P 500 was down, and in other indexes the statistics were even worse.  Along with the poor breadth statistics, there are a number of key statistics we'd like to point out.  As most of you know the 200-day moving average is a generally recognized demarcation between a bull and bear market for just about any average.  On October 11th, the 200-day moving average for the S&P 500 was briefly broken, followed by a strong rally on October 16th.  In a "normal" correction, the rebound should have carried the S&P back to near the 50-day moving average, however that did not occur.  The rally was followed by a very weak follow-through and then sold off the following 3 days.  Today the market has opened down more than 2%, with all major averages down.

    The indicator below is our proprietary indicator that shows the percentage of stocks in the index off their highs.  The red line is the percentage of stocks in the S&P 500 currently down more than 20% off their 52-week high (already in a bear market).  The current level hasn't been reached since the market exited its correction in early 2016 following the Brexit panic.

    Another chart tells a similar story, this indicator is the % of stocks in the S&P 500 above their 200-day moving averages.


    To see the technical damage that has truly occurred in the market, let's look at the Russell 3000 index.  The Russell 3000 tracks the largest 3000 stocks in the U.S. with over 98% of the entire U.S. market capitalization.


    Over 49% of stocks in the U.S. stock market are down more than 20% and currently in a bear market!  30% of stocks are in correction mode, down more than 10%, but not quite 20%.  And only 20% of stocks are within 10% of their 52-week highs.  This is not a healthy market. 

    Percent of stocks in the Russell 3000 above their 200-day moving average:


    Furthermore, the U.S. market has been the hold out (along with Japan), as global markets have declined.  Germany's DAX has plunged 10% over the last 50 days with France and China not far behind.


    In short, the safest place to be at the moment is Short-Term U.S. Treasuries via ETF's 'FLOT' and 'BIL'.  We are monitoring Utilities and precious metals ETF's such as 'GLD' as well, updates to follow!

    Good luck trading!  We hope you find our commentary and analysis useful.  Please don't hesitate to reach out with any questions or comments.

    tr@mcrmarketreport.com



MCR Market Report - The Leader in Quantitative Analytics

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