Date: December 4, 2019

3 in a Row for the Bears as ISM and Trump Give Aid

The bears are on a three day winning streak with Tuesday scoring the most points and the chorus growing louder that this is anything but a harmless little pullback. On Monday, the media chalked up the decline to the ISM survey which was disappointingly weak. If that was truly the case, why did bonds also sell off? If the economy was weakening, shouldn’t bonds have rallied? My good friend, Tony Dwyer (@dwyerstrategy), offered that the media reported a disappointing number based on one account whereas another account showed that number to be stronger than expected. Tony said that stocks were just looking for an excuse to decline, something I have been writing about for three weeks or so.

On Tuesday, the on again, off again trade tantrum with China was suddenly back on as President Trump’s 5:15am off handed comment about possibly not having trade deal in place with China until after the 2020 election may be the best course for the U.S. That sent overseas markets plummeting and the U.S. stock indices opened near its low for the day with the Dow down more than 400 points. From there, very quietly, stocks slowly crept higher all day and into the close. With so many money managers sitting on boatloads of cash and only four weeks left in the year, there won’t be many more opportunities for folks to buy into weakness in hopes of playing some catch up into year-end.

Looking at the major stock market indices, the Dow has pulled back to a logical area to find buyers. The S&P 500 and NASDAQ 100 still have another 2% or so to go. The weaker S&P 400 and Russell 2000 are basically there. However, I still don’t believe the all-clear has been sounded. Stocks are supposed to bounce from here, so don’t be surprised if they regain all that was lost on Tuesday. However, I don’t have strong conviction that the mild pullback is 100% complete.

Speaking of the weak Russell 2000, I direct you to the chart below and the lower horizontal, blue line. It seems like bull and bear alike has been focused on that line in the sand for some time in the small caps. As you can see on the far right of the chart, price finally broke above the blue line which simply represents the top of the trading range we have seen all year. While the bulls began to celebrate, it was short-lived as the bears immediately put up a fight, pulling price back into the 2019 range. Chartists will call this a false breakout, which can be a powerfully bearish signal if we price follow through to the downside, something I am not counting on just yet. I think the bulls have some dry powder up their sleeves and will not allow the bears to make much progress this month.

December is off to a less than stellar start, which is somewhat typical as I mentioned on Monday. Stocks usually find a low around the third Friday of the month, plus or minus a week. I expect this December to be no different. The cracks in the pavement I have been discussing for three weeks won’t be magically fixed and if my scenario is correct, price will rally despite these warnings into what may be an even bigger warning come January.


Paul Schatz, President, Heritage Capital