Record Breaker

1. small is BIG.  I, myself am sometimes guilty of it.  When analysts say things like “stocks are up”, they are usually referring to the S&P500 or the Dow Jones Industrial Average.  But what does it really mean if those indexes are up?  Let’s take the Dow for example.  It is a group of stocks picked by a media company that historically represented industrial America.  Looking at the thirty elite companies, you will notice that they are all large and represent the best of the best across all sectors.  Similarly, but a little broader yet is the S&P500 which is an index of the 500 largest market cap companies in the US.  Wanna give a guess on how a stock gets a large market cap?  The simple answer is that a stock’s market cap increases as its share price goes up, which is presumably due to earnings growth.  The S&P500 is therefore a self-selecting index of the best performing stocks.  The two most popular indexes are therefore a great representation of the most successful US companies and investors in those indexes have historically been successful as well.  But what about the thousands of other public companies that haven’t made the list?  There are, indeed, many public companies that have exceptional revenue and earnings growth with great potential upside that have not yet reached “the big leagues”.  In fact, these companies have more potential upside than their larger cousins.  Small cap stocks returned +11.2% average annual growth between 1980 and 2015 compared to only +8% growth for large cap stocks.  Even more importantly, small cap stocks provide a much more detailed picture of corporate success… or failure.  That is precisely why many quantitative strategists use indexes like the Russell 2000 to gauge true market trends.  It is also why I include it in my daily market readout and chartbook.  For most of 2019 the Russell 2000 has lagged behind the large cap indexes as they managed to reach new all-time highs.  Yesterday, the Russell finally joined the dance closing at a 52-week high.  Though it is still about 6% away from its all-time high, the 52-week high represents a noteworthy breakout, which can be a positive sign for all stocks.

2. Closer yet… maybe.  Yesterday’s big trade news that China was publicly proposing stricter penalties for intellectual property theft, reported here, was the big driver in the session’s record breaking rally.  Overnight, WHILE YOU SLEPT, Stephen Mnuchin, Robert Lighthizer, and Liu He had a phone meeting in which they discussed some finer details of a phase one trade deal.  Though nobody has released a rough transcript of the call, it was apparently a good one because according to China’s Commerce Ministry, the two sides reached a consensus on a few issues.  Stock futures initially shrugged off the news but have since strengthened a bit.  It appears that the sides are inching closer to a deal which should continue to help stocks maintain their overbought condition.  Another helper remains the Fed.  After  yesterday’s close, WHILE YOU WERE STUCK IN TRAFFIC, Chairman Powell spoke with a somewhat positive bias about the US economy, stating that he saw the “glass much more than half full”, but left the door open for further stimulative policy moves.

– Federal Housing Finance Agency’s House Price Index is expected to show a +0.3% month over month growth compared to last month’s +0.2 growth.

– New Home Sales are expected to have climbed by +0.6% compared to last month’s slip of -0.7%.

– Economists expect Consumer Confidence to have climbed to 127.0 from 125.9.

– Fed Governor Lael Brainard will speak today.

– The treasury will sell $41 billion 5 year notes.

– This morning Burlington and Best Buy beat estimates.  Before the bell we will hear from Abercrombie & Fitch and Analog Devices.  After the bell earnings include Dell, HP, and VMware.