J2 Market Minute
An advisor resource for a look at what's going on in the market this week

Market taking crazy pills?
The market has been merrily reaching all-time highs nearly daily in the face of a virus has more than 70 million China citizens on total lock down. Who's working in the factories if everyone is sitting home? We will cover in future writings whats driving this market rally and investors perceptions.

In last weeks weekly update we asked the question "But is the market under-pricing supply chain disruption? .

  • Our conclusion was: The stock market may be under-appreciating the impact to global GDP. Supply chain disruptions are and will continue to occur. The market is currently pricing a short term disruption, but things can change if China cannot gain control over the spread of the Coronavirus.

AAPL - it''s happening: This morning we wake up to news that market darling and the hedge fund risk free asset and bond proxy Apple is warning on revenue . Are you really surprised? Yet people were buying Apple near all-time highs last week.

How could this play out? It's plausible to assume that corporations will start to over-stock supplies to guard against this shock. Amazon is already busy doing this . This will make it appear that the damage from the CoronaVirus was limited on the next few months, however the hammer will drop once the world gets through the CoronaVirus and companies now need to de-stock those supplies.

J2 Capital Management has been thinking though the possible outcomes and potential impact for weeks. In this type of uncertain environment and potential risk we see an asset like Gold playing a key part in client allocations.

  • J2 Low-Volatility ETF strategy - We took an initial position in a gold ETF last month.
  • J2 Dynamic Mid-Cap Growth: We allocated to a new gold mining stock that actually is growing revenues quite nice.
  • J2 Value and Dividend: We own a 5% position in this value and dividend stock portfolio.
Japan stuns the world and posts steep GDP drop - Doesn't even include CoronaVirus impact!
Recession Fears

  • The world's 3rd largest economy shrunk by the most since 2014. The 4Q GDP showed a contraction of -6.3% on an annualized basis vs the -3.8% estimate.

  • This creates the return of a possible recession fears going forward in Japan and can serve as a leading indicator for other economies that have been effected by the corona virus going forward.

Chart courtesy of Bianco Reserach
Infection Rates Outside of China

  • While we were focusing on the number of infections and infection rates in China we have shifted our focus over to tracking the amount of infections outside of China in places like Singapore and Japan.

  • This comes after a recent uptick in the number of infections after the Chinese came up with an alternative way of counting the number of infections which further indicates that the numbers out of China can only be taken with a grain of salt. We don't know for sure if the numbers out of China are legitimate or if they are simply altering the report to fit the data that indicates a deceleration.

  • With more accurate reporting going on outside of China, this should give a better signal to the severity of the virus and also the amount in which it spreads.
News to Note
  • Tax Incentives for Americans investors. On Friday the White House announced that it is considering ways to incentivize U.S. households to invest in the stock market. While it is still being worked out, one of the incentives would be a portion of income would become tax-free if it was used for investment purposes.This is all a part of an economic stimulus package that the Trump administration is considering introducing. Are we all confused at the constant need for stimulus in a 9th year of an economic expansion?
Economic Data
Monday:
  • None scheduled

Tuesday
  • 10:00 AM - NAHB home builders index
Wednesday
  • 8:30 AM - Housing starts
  • 8:30 AM - Building permits
Thursday
  • 8:30 AM - Weekly jobless claims
  • 8:30 AM - Philly Fed manufacturing index
Friday
  • 9:45 AM - Markit manufacturing PMI
  • 10:00 AM - Existing home sales
Earnings
Monday:
  • $HSBC $NRBO $SCI $BRDCY
Tuesday :
  • $WMT $ENPH $GRPN $HLF $GIS $FANG $TSEM
Wednesday:
  • $ICLR $IART $APRN $Z $SEDG $NVTA $KL $DISH $FIVN
Thursday:
  • $DPZ $EPAM $FIT $FSLR $DBX $ZS $WIX $FSLY $APPN $HFC
Friday:
  • $HSC $DE $MGA $WPC $PNW
Big Picture Charts
SPY – Recovering from its initial pullback from corona virus fears bulls have taken back control of price action bringing us back to new highs. We were able to close out the week with another new high for the record books even with virus fears still lingering.

XLI - The industrial sector has been showing great strength as it attempted to make a new breakout high this week but was unable to hold those gains to close out the week. As a sector that has lagged behind others a new high here would be a positive for the whole market as ISM manufacturing index has made a slight recovery as well.

VNQ - The real estate sector continues to be a favorite among the sectors as interest rates are expected to stay low going forward. This ETF was also helped by the big jump in prices via the Sprint and T-Mobile deal as this ETF holds multiple 5G tower REIT's.

GLD - Gold has been consolidating its recent gains and has maintained its position as a hedge against uncertainty. As equities have rallied to new highs it seems investors are still not ready to let go of this protection. After its sideways trading we have begun to breakout to the upside through a similar channel earlier in the year.
Mortgage Rates
Chart courtesy of Charlie Biello
Housing Support

  • As you can see rates on a 30 year mortgage are close to all time lows at 3.45%.

  • With interest rates continuing to decline and no hints from the Federal Reserve of any hikes any time soon, this has positioned the consumer and stocks within the real estate sector to continue to benefit from this low rate environment.

  • J2 Capital favors housing: We are positive on the housing sector and currently favor it over other parts of the equity market. We like the long term tailwind this sector will provide as well as knowing that rates will remain low for a long time.

US Earnings Season
Chart courtesy JPM
Earnings Not Too Bad - Or maybe they are!

Now that the majority of companies have reported their 1st quarter earnings we have a better picture of the health of earnings.

  • After flat earnings in 2019, we have begun to show some signs of acceleration.

  • 74% of the S&P 500 companies have beat EPS expectations, and 66% have beat their sales estimates.

  • However, a lot of the EPS growth is mostly on the back of record stock buybacks which reduced the number of shares outstanding (thus lowering the denominator in the EPS calculation). Further more, more and more of the positive earnings headlines we see are being driven by just a handful of stocks. Concerning indeed.
Top Heavy Market

  • Sure earnings have started to rebound but most of the EPS growth is due to the market leaders Apple, Amazon, Facebook, Microsoft, and Google.

  • When we look at the market as a whole they have continued to be flat to negative, especially with the small cap sector falling way behind the large cap tech giants.

  • Another factor of this is the popularity of passive investing which continues to push money into these top names creating a concentrated market around large cap tech.
Asset Bubbles
Disrupters

  • As we look back on previous asset bubbles we can see that this current "bubble" they are calling the disrupter bubble has surpassed all the rest in terms of % gains.

  • These disruptive companies are almost all technology companies that are altering the way businesses and consumers operate hence the name disputers.

  • Software, medical technology, and semi-conductors are a few of the disrupting sectors that have seen a huge run up since the housing bubble of 2008.
Breadth
Chart courtesy of @Callum_Thomas
Divergences

  • As the S&P's price has continued to make a new high, the % of stocks that remain above their 50 day moving average have actually decreased.

  • These types of divergences can be indicators that the momentum of the move is slowing down and a pull back may be in order.
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About J2 Capital Management

J2 Capital Management is an SEC-registered investment adviser that provides financial planning services to the public as well as investment management services to institutional and individual investors (3rd party).

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