Summary

• What a week to start the year. U.S. stocks trading like an emerging market
• Big money flows into emerging markets, particularly big Latins.  Look at move yields and currency
• U.S. bond yields spiked on Friday as stock shorts, as we expected, got their “Friday facial”
• European periphery spreads wider on the week
• Big moves in EM FX with Brazil leading the way
• EM stocks up big
• Brazil’s country ETF, EWZ, our favorite stock market up almost 9 percent in 2019! The return includes the currency move
• Should see a catch-up move in Asian stocks tonight
• U.S. biotech had a good week, up over 8 percent
• Euro banks had a nice bounce, up 4 plus percent
• Crude oil led the stock recovery, up 5 percent on the week
• Iron ore close to taking out February 2017 high, probably on expectations China is going to rev up the old economy to rescue its new economy
• Corn looking decent and poised to break to six-month highs

Commentary:  Wild volatility to start the year and is likely a reflection of things to come.  The S&P rallied on what many believe was a policy change by the Fed after Chairman Powell’s comments on Friday.  We, however,  heard “Yanny” while the market heard “Laurel.”  In the spirit of Keynes’ beauty contest, it doesn’t matter what we hear.  What matters is what we think the market heard.   It’s clear from the charts below what Mr. Market heard and has flipped from expecting two rates hikes by the end of the year to a 25 percent probability of a rate cut by year-end.

S&P Targets

The flip-flop, though we agree with Chairman Powell the market has gotten ahead of the data (go no further than Friday’s employment report),  is enough to give legs to the short-term rally that we were expecting on New Year’s day.   The S&P500 looks poised to quickly take out its declining 20-day moving average at 2538.91, which was where it got rejected on Friday.   Then we are looking to 2573.61,  the first Fibo retracement of the current move.

DECEMBER LOW

The most significant level in the universe right now is the S&P’s December low of 2346.58, which we believe, eventually, will be retested after the lather of the current rally washes off.  Holding the December low will determine the stock market direction for 2019.

“We got a really thorough washout on the breadth of the market [in December]. If that low gets taken out, I’m going to have to rethink the bull case.”   – Jeff Saut, Raymond James