Feb 9 2020 - Predictions: Amazon Rules Rally This Month

Summary

It looks like the stock market avoided the worst-case scenario in the sell-off. Now I think it will plateau for a while.

A corrective phase can be a sideways action. This is actually great for a trader. Buy the dips can rule once again.

A lot of players were shaken out of the market end of January and they will want to get back in, so we may even see new highs.

Let the market come to you. There are names that I like even now. I would just be careful buying right away at the open. Don't buy the highs.

I still think Amazon will lead, but Alphabet should be a good alternative. I also like the social media names for next week.

S&P Approaches 4,000 before year-end, but first the short term

Let me start with the admonition that we aren’t going to get to 3,999 on the S&P 500 in a straight line. Yet there are some powerful macroeconomic tailwinds that underpin this rally. First, the S&P 500 right now. I am very pleased with the way this corrective phase is playing out. The Friday before last was an excellent flush of trading excess at high trading volume. The driver was the sum of our darkest fears, PLAGUE!

This was a good alternative to what I was afraid of which was a rounded top, with a roll-off that ended in a 7% drop; instead, we got a hard and fast plummet on that huge volume. The volume is significant because all those people who were shaken out will have to get back in. It followed that logically that, as the next few days unfolded with the news that the epidemic was over there and not here. I concluded that we’d rally and I told you so on Monday.

This Friday was a mere echo of last week which shows just how meek traders are right now. This is evidence that the euphoria that I was afraid of has largely gone for now. Commentators that always look for an overlying reason for bearishness or bullishness noted that, with the amazing employment numbers, the likelihood of an additional Fed rate cut that started showing up in the futures has started to dissipate. That actually makes some sense to me. The jury is still out on that cut, but I sense that Powell wants to be hands-off lest he is accused of tipping the scales in the presidential for either side.

I love that some commentators are predicting another flush to the downside. There is a third way

While some talking heads are bullish, I sense that most others speak darkly of yet another leg lower. As if because there was one “Black Swan” event, surely there must be another waiting in the wings. Both of these groups are forgetting the third way; the rally may very well moderate and chop around this level through the end of February or perhaps longer. Markets can go through a corrective phase by treading water. I am not saying it is going to flat-line. We will have a decided chop, but I think that steep drop on Friday before last will give us a base to work from. Look, we may even breach additional new highs next week, but then there will be a retreat, in a one-step forward one step back fashion.

A sideways motion with a cadence is nirvana to a trader. It makes it okay to buy the dips

I hesitate to start giving resistance and support levels right now. I think we surprise everyone with a nice little jag to new highs first. That will draw in traders, only to hurt them in the retreat. This process will only serve to create new buyers as the up and down motion sets in and cleanses the excess and paves the way for extended new highs later in the year.

This is not the time to use new highs in the S&P as the signal to extend risk. I would much rather look to the stocks that are on the upswing in the downturn and go long on them. More on that later next week.

Let me settle my overall bullish predictions for 2020. You all should be doing this. Don’t let others spoon-feed you your market sentiment. You could be wrong, I could be wrong, but start with a premise, and until you are proven wrong, make that your operating principle.

If you are otherwise bearish, that means you want to short every rally, or find names like an IBM (NYSE:IBM) (IMHO) which is going lower and bet against them. Or maybe that Casper (CSPR) stock which loses money on every “Mattress-in-a-Box” that it sells.

Of course, if the market rips your face off (technical trading term) as you go short the SPY or the QQQ, you may want to reassess. My operating principle is that this stock market is going higher. It will meander, it will stall, and it will temporarily sell-off. However, the overall direction is up, and more importantly, it is way up.

Why will we see 20% on the S&P 500? The same reason we will see GDP approach 2.9%

The economy is way stronger than the top-line numbers are telling us. The BLS released the employment numbers and we added another 225K in jobs. What isn’t noted is the household survey, which showed 418K people newly employed. The household survey is meant to capture the small business employment, the part-time worker, the contract worker who may not get withholding and so doesn’t show up on the official stats. This another indication of the phenomenon I have spoken about before...

Main Street is doing better than Wall Street

You don’t hear the media talking about how Main Street, the little guy, is thriving. For some, it doesn’t grab eyeballs so why bother, for others, it just doesn’t fit their narrative, or they just don’t think it is news. I think that over time a few will grudgingly admit that the lower wage worker is being paid more, relatively a lot more, than in the past few decades. Why is that? Small business, service businesses, businesses whose raw material is human capital, they are the ones who are pulling people off of government dole retirement or family support and putting them to work. How do they do that? By offering them substantially more money than the dole. Many of them get on-the-job training and a new life.

Average hourly earnings rose 3.1% over a year ago to .44, ahead of estimates for 3% growth. That marked 18 consecutive months of wage gains above 3%, as the initially reported 2.9% for December was revised up to 3%. Tellingly, production workers are growing wages at 5%; we are having a blue-collar boom. Income inequality is narrowing which will lower the ability for some to gin up class tensions. Take-home pay is up for the lower-wage worker K on average since the new administration took over. Income growth for the middle class up 4%; with low inflation, that is a lot of additional purchasing power.

The employment-to-population ratio in the household survey rose to 61.2%, its highest since November 2008 and 0.5 percentage points higher than a year ago. The peak was in 2006 at +63%, that means there are an additional 6 million potential workers available to add to payrolls

The unemployment rate ticked higher to 3.6%, but for the right reason as the labor force participation rate increased 0.2 percentage points to 63.4%, matching its highest level since June 2013, according to data released Friday by the Labor Department - can we let that sink in for a moment. You have to go back nearly 7 years to get back to this level of worker participation rate.

It means a lot of things; first, it means that there is still plenty of human capital supply. This will hold back inflation. Secondly, let us use the term “operating leverage” which is normally used for individual company performance. The literal definition from our good friends at Investopedia.com, it is a “formula that measures the degree to which a firm or project can increase operating income by increasing revenue.” I want to use this as a metaphor for the leverage that builds for GDP as more and more lower-wage workers join the workforce. These are the biggest consumers since most of their income goes to consumption. This, in turn, juices domestic output, especially services which in turn employ a lot of the lowest quintile of earners. We have a pro-cyclical economic trend that will play out with higher growth going toward 2.9% GDP by year-end.

Other trends: Boeing (NYSE:BA) restarting Max manufacturing by April/May which should get manufacturing back on track. There are China’s purchases of our Ag and Energy exports. China has confirmed that it will conform to the “Phase 1” purchasing plan. We also have China pulling out all the stops on economic stimulus to counteract their temporary stall on economic activity. We have a USMCA trade agreement enacted that should add to GDP. Then you have the UK trade deal that I understand both sides want to conclude very quickly.

The ten-year bond is going to stay low, and mortgage rates will stay low. Housing and housing starts are going up. Housing is the missing piece for a rise in GDP. Consumer household net worth rose 47% over the last 3 years, which is going higher and adding to consumer confidence which is at all-time highs and building up even more consumption.

All this is the backdrop for our stock market and why I think that we get another 20% by year-end

We are headed into the November election with an administration that counts the stock market and overall economic growth as its Key Performance Indicator. With that as its KPI, you can bet that the Trump Administration will do everything it can to keep the Golden Goose ovulating. So our ten-year well below 2% and likely to stay nailed there by global demand for our bonds.

Additionally, with corporate profits doing a lot better than expected, judging by the Q4 ‘19 reports, we will see a rise in stock prices, propelled principally by the earnings but also with a modest rise in PE ratios to 20 times. As inflation is nowhere to be found, earnings become more valuable and that justifies a higher valuation. Make no mistake the bulk of growth in the first half will be led by the consumer, as it has for the last 18 months. By the latter half of the year, I expect manufacturing to further juice earnings.

Amazon gets the reins back and is going to lead the rally

Last week I showed you a simple chart of Amazon's (AMZN) basing action between ,600 and ,800 for much of the last six months. It was a chart of the frustration of many stock market bulls who rely on AMZN to lead the rally or signal a temporary retreat. With earnings records totally smashed, I illustrated a chart, here it is…

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I believed that this long base will result in a powerful rally. I used the Louise Yamada quote, ”The longer the base, the higher in space.” Of course, the market almost never behaves the way you want it to. AMZN did indeed rally but only in fits and starts and then mostly on just this past Friday. What happened? Is it time for me to change my thesis? No, and in fact, I am encouraged. That is because AMZN had tremendous headwinds in the form of insider selling in the Billions (yes with a “B”) by none other than the founder, Jeff Bezos. This has been the biggest selling of his shares ever. Bezos’s sales of Amazon stock recently reached about .45 billion. On February 6, he sold 900,000 shares for about .3 billion, on February 5, he sold 300K+ shares for almost 0 million, and on February 3, +360K shares for 0M+. Yet, AMZN stock, even under all that selling pressure, finished up nicely for the week. I don’t care what stock you want to talk about, selling around .5 billion worth of shares is going to keep a stock down. It might just stay down because market participants might think something untoward is going on. However, the earnings were so good, and Bezos obviously has a lot more personal reasons to sell that the bull case is still very much intact.

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AMZN hit nearly ,100 at ,098 this Friday closing at ,079, and it closed the prior Friday @ ,008. That's a nice numerical gain, but I expect more upside once the fear of selling subsides. Or a fast money trader can try and make room for downdrafts in his trading strategy by rolling up the spread when AMZN rises, then rolling it down when the stock price recedes again. That back and forth movement if done right can generate a lot of alpha, but you have to watch the movement obsessively. Not sure many people who aren’t purely dedicated to trading can do that. Thank goodness there are trading apps on your phones. Even so, I expect that if we do avoid another 1.5%-2% downdraft on the indexes, AMZN will soon be a few hundred points higher than where it started last week.

What other stocks look interesting?

Well, Alphabet (GOOGL) (NASDAQ:GOOG) recovered all the stock losses, and as traders and investors think about it further, the growth prospects for GOOGL are very bright. There was a reason why Ruth Porat, the very capable CFO, and Sundar Pichai have broken out both YouTube and Google Cloud Platform. GCP and YouTube will be the growth drivers, while the core ad business is no longer expanding by 20%, at 17% at the size that that business is, that is pretty fantastic. The long and the short of it is, there will be other drivers coming online to keep this leviathan growing apace. So yes, if you are afraid that Bezos has more billions to redeem, and you want to trade a mega-cap, GOOGL might be the stock for you.

How about Pinterest (PINS), I have spoken positively about this name from the IPO and was not rewarded for my early ardor. However, PINS is finally proving my thesis that it will be a unique property with elements of social network and e-commerce in a way that will give Instagram competition for ad dollars. Also, I think some categories like weddings and decor, not that I am anywhere near an expert, will have a unique appeal. Like I said early on, this name has a scarcity value as there are only a few viable social network advertising plays; Twitter (TWTR), Snap (SNAP), and Facebook (FB).

Could PINS rally mightily from here? Yes. I think all these names could do well. I think SNAP was unfairly sold off. They had healthy DAU growth. The fact that they missed revenue wasn’t the “fault” of the network, it was shoddy ad selling, or maybe the app needs some better product management from the ad serving and client onboarding side. Maybe what SNAP needs is a good activist style fund to get in there and shake things up. SNAP CEO Evan Spiegel is well regarded as a product guy, genius even, maybe he needs to think about the product for the customer at least as much as the user. I also thought that Twilio (TWLO) was unfairly sold off last week and the CEO gave a spirited defense of the name.

For next week’s trading

Even with the above names, if you haven’t yet initiated a position, consider not buying at the open if the futures are up. I see a pattern where trading peters out into the late morning and then starts to rally again. You might wait until 11ish to try and scalp a better price.

My Trades: I am long AMZN, General Electric (NYSE:GE), and PINS in long calls. My AMZN is spread and I will look to spread and add to my GE and PINS positions. I have my eye on getting back into Boeing and am seriously looking at SNAP, also via calls. I am also considering long puts on IBM reflecting my bearish view on the new management structure.

Disclosure: I am/we are long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long PINS and GE via CALLs, I am long AMZN via CALL spreads

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