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Stocks are expected to break out to new highs, barring any errant presidential trade tweets

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Traders work on the floor at the New York Stock Exchange.

Eduardo Munoz | Reuters

The stock market is itching to make new highs, and it may soon, as long as progress continues to appear to be made on the trade war front.

Technical market analysts, who watch stock charts, see an opportunity for stocks to break above previous highs, after the S&P 500 rose above its 50-day moving average last week and crossed above August highs, two signals of positive momentum.

For fundamental analysts, there are other positives in place for stocks, including a possible bottom in interest rates, central bank easing and a pick up in some economic data.

But the one wild card is the trade war, which appears to be making progress with talks planned for October between U.S. and Chinese officials.

The S&P 500 is about 1.7% away from its late July high of 3,027.98, and stocks have recently been driven higher by strength in technology and consumer discretionary stocks. Both sectors are within 2% of all-time highs.

“Technically, it set itself up, and now it has to keep itself there,” said Scott Redler, partner with T3Live.com. “For the camp that wants to see new all-time highs, they would like to see the S&P 500 to hold 2,940 to 2,955. The longer it holds that, the more likely it will be make 3028, the all-time high.”

September has started off on positive footing after August’s decline. Usually a weak month, the S&P 500 was up 1.7% so far for September, as of Monday. On Monday, the S&P closed at 2,978, down 0.2%.

Stocks started Monday higher, but were mixed to flattish in afternoon trading, as technology stocks gave up some gains. Small caps, however, were outperforming, with the Russell 2000 up 1.2% in afternoon trading. Small caps are a sector that has been lagging and was expected to rise as the market returned to its highs.

Bond yields, which have moved to worrisome low levels in August, have been higher in September. The 10-year Treasury was yielding 1.63% Monday afternoon.

‘Shakeout summer’

“Last week’s action was meaningful from a trading basis, in that we broke above the August range, the upper end of the range being 2,940,” on the S&P 500, said Ari Wald, technical analyst at Oppenheimer. “I think the underappreciated point for us is the market is coming off cyclically oversold levels.” in the past 52 weeks, the S&P has moved higher by just 2.75%, he added.

“After such little market progress, we’re starting to see signs conditions are getting better and global equities are beginning to base in a move higher,” said Wald.

He said the market is still reacting to last year’s sell-off, and is now in a position for a move higher. “When it’s done raining, it’s still wet outside, and that’s what we had in 2019. The storm was in 2018 when we had the big downturn in December,” Wald said. “2019 has been base building… It was our case there would be a shakeout summer.”

Wald said there is also a negative attitude on the part of investors, which could act as a contrarian positive. “The way things are shaping, I think we could experience a nice run up in the equity market in the next 12 months. Clients, and investors, are just coming up with every reason possible not to buy stocks. it’s very telling, on a contrarian basis,” he said.

Trump tweets

James Paulsen, chief investment strategist at Leuhtold Group, said there are fundamental factors at work, that are also helping stocks and could push them to highs.

“It’s near an all-time high but a mid-morning tweet could put it back,” said Paulsen, adding that the trade headlines have created turbulence for stocks. Strategists say tweets from President Donald Trump could move the market in either direction, and recently his trade tweets have been more negative than positive.

“It does seem, since the Trump tweet [on trade] in early August…the biggest thing that’s changed since then is the global economic reports have gotten better on average,” said Pauslen. Paulsen said he has been watching economic surprise indexes, and they are rising globally. The indexes measure beats against misses on economic data, and when they are positive it is perceived as good news for the stock market.

“Momentum might be improving. Along with that is recession fears are receding. Rates are going back up,” said Paulsen. When rates hit very low levels in August, the move reflected fears of a recession and stocks were also shaky.

Paulson said the improvement in the economic data is coming as some prior central bank easing is having an impact. “We’re focused on the Fed and the ECB, but there’s been easing for nine months, and that’s starting to come home to roost.”

But he cautions that if the yield curve does not steepen and is inverted that could undermine investor confidence, since it is a recession warning. The yield curve is inverted when short term intrest rates are higher than long duration rates. He said the Fed should cut rates by 50 basis points to help the process.

The European Central Bank meets this week and it is expected to take some action to possibly cut its already negative yields and boost its asset purchase program. The Fed meets next week, and it is expected to cut interest rates at least by a quarter point.

JP Morgan equity strategists expect the stock market to rise into year end, and they see a list of reasons to be positive about. “Better technicals, light positioning, more favourable seasonals, signs of a trough inactivity momentum, potential de-escalation in trade uncertainty, 2nd Fed cut— which might move ahead of market expectations this time, and finally the up coming restart of ECB’s QE are likely to be the positive catalysts for this up move, in our view,” the strategists wrote in a note.

U.S. economic surprise index

Source: Citigroup

With the change in tone for stocks, analysts say it’s time to shift holdings.

“Cyclicals/Defensives flows, price relatives and Value/Growth valuations all look stretched, with Banks in particular trading significantly below what peripheral spreads would imply,” noted the J.P. Morgan strategists in a note. “We have argued last week that a turn in sector leadership is upon us, especially if bond yields inflect higher, where Cyclicals and Banks should be favoured into the year-end.”

Paulsen said he sees opportunity in smaller tech names, versus the FANG stocks—Facebook, Twitter, Amazon and Alphabet, Google parent. To varying degrees, the FANG stocks have been subject to government scrutiny for possible new regulations or even taxes on the group.

“It’s still not easy out there. The rotation could be vicious at time, whereas in the last two weeks you just saw the cloud computing and software names lose momentum and get hit. You also saw the hot IPO sector lose momentum and get hit. You need to be in the right place at the right time,” said Redler. “Shorts aren’t doing so well. You really had to be a surgeon to pick the best spots and keep moving fast to stay with the sectors that are in vogue.”

Wald said one sector that is showing strength is semiconductors, despite the ups and downs of trade headlines. He said the Philadelphia Semiconductor Index SOX, which has reclaimed highs, is showing signs of a bigger breakout. Wald said he expects tech to continue leading the bull market higher.



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Roku could fall another 30% before finding a bottom, chart suggests

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The streaming wars may have claimed a new victim.

Roku shares plummeted nearly 30% last week, its worst weekly performance stretching to its 2017 IPO.

The streaming platform stock was pummeled Friday after Pivotal Research slapped a sell rating and $60 price target on it, fearing a rush of competition in the space. It was crushed days earlier after CNBC owner Comcast announced it would offer a free streaming box to its internet customers.

It could get even worse, according to Craig Johnson, chief market technician at Piper Jaffray.

Roku has “violated the uptrend support line off those April lows of this year. You’ve got some support that comes in at $113. But purely based upon the charts, your best support comes in all the way back down at the 200-day moving average. So you can see the stock trade back down to $81, maybe even $75,” Johnson said Friday on CNBC’s “Trading Nation.”

A move down to $75 marks 30% downside from current levels. It has not traded at that price since May.

“The risk/reward isn’t favorable. Even though the stock is up, it has sold off quite a bit in here recently. I still think you got about 30% downside and maybe a relief rally of 7% upside, so I’d be selling into this move,” said Johnson.

Quint Tatro, founder of Joule Financial, does not see Pivotal’s note on Roku as the stock’s death knell.

“Obviously, the stock got way overheated, trading 25 times sales, but [Pivotal’s] rationale regarding losing market share I don’t agree with. You have to understand, this is a cord-cutting product so their whole rationale is that the cable companies are going to offer their own device for free in order to compete. I’m a Roku user. I own six of them in our home and office. I have not had cable for years so I would not switch to a cable device,” Tatro said on the show.

Tatro says a pullback in Roku’s share price to 14 to 15 times sales, around $100, would make him a buyer. Roku would need to fall 7% from Friday’s close to get to that level.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.

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The market rotation this month may have been driven by a technicality

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A trader works at the New York Stock Exchange in New York.

Wang Ying | Xinhua News Agency | Getty Images

What exactly happened during the “once in a decade” stock market rotation earlier this month that rocked investors? It might’ve just been a one-off technical move and not based on fundamentals.

A huge rotation out of momentum into value names took place suddenly last week. Many read the phenomenon as a warning sign as stocks with superior growth have led the market’s bull run in recent years and said a rebound in interest rates was the catalyst. However, the reversal in momentum, which seemed to abate this week, could be explained by a sudden stop in tax loss harvesting, some on Wall Street said.

The idea is that investors often sell losing stocks to lower their tax bill from the capital increases, a technical move that’s quintessential of a momentum trade — chasing winners and dumping losers. The amount of such activity might have decreased significantly last week due to speculations the Trump administration would pass a bill to reduce capital-gain taxes, therefore reducing the incentive to sell their losers.

“It’s quite possible some of the dominant robo advisors could have assumed that the U.S. administration would indeed follow through with its proposal on Sept. 9, and decided to change their optimization to take this into account,” Barclay’s head of equity derivatives strategy Maneesh Deshpande said in a note on Wednesday.

President Donald Trump earlier this month floated a proposal to tie capital gains taxes to the inflation rate, which could lower the taxes investors pay on profits from selling assets. He eventually ruled out such a plan on Sept. 11. But the discussion around the proposal last week coincided with the change in stock leadership that shocked many investors.

Tax loss harvesters might have stopped selling losers and adding winners on the prospect that capital-gains taxes would go down, which could make tax loss selling less beneficial. Such a change could have caused the downturn in momentum due to less selling of falling stocks and less buying of rising names.

The amount of active tax loss harvesting has ballooned over the years as robo-advisers, which automatically allocate assets in a tax efficient way, gained popularity on Main Street. Robo-advisers now manage about $1 trillion assets, up from $240 billion in 2007, according to Barclays.

“Of course, it is also entirely possible that some other investors would have put on the trade in anticipation of such a proposal,” Deshpande said.

The iShares S&P 500 Value ETF hit its highest level since January 2018 on Sept. 11 as the rotation hit its pinnacle.

Value, cyclical companies with low prices relative to earnings and book values tend to be sensitive to economic growth. However, embracing the group without a material change in the economy doesn’t make a lot of sense, analysts warned.

“Absent an improvement in underlying economics, we believe that the recent shift in leadership is unlikely to persist,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse said in a note Monday.



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‘Game of Thrones’ ends run with best drama award, 59 total Emmy Awards

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D. B. Weiss (C, speaking), David Benioff (3rd L) and cast and crew of ‘Game of Thrones’ accept the Outstanding Drama Series award onstage during the 71st Emmy Awards at Microsoft Theater on September 22, 2019 in Los Angeles, California.

Kevin Winter | Getty Images Entertainment | Getty Images

Despite mixed fan and critic reactions to the final season of “Game of Thrones,” the eight-season epic took home the top prize in the drama category at the Emmy Awards on Sunday.

Closing out the 71st annual television awards ceremony, David Benioff and D.B. Weiss thanked creator George R. R. Martin for entrusting his book series to the young producers more than a decade ago and praised the cast and crew for their work on the program.

Since 2011, HBO’s “Game of Thrones” has garnered 160 Emmy nominations and taken home 59 prizes for everything from acting and editing to special effects and sound mixing.

On Sunday, the program earned two Emmys, one for outstanding supporting actor, which went to Peter Dinklage for his portrayal of Tyrion Lannister, and one for outstanding drama.

Earlier in the month, “Game of Thrones” won 10 additional awards during the Creative Arts Emmy ceremony.

“Game of Thrones” final award tally falls short of the 67 Emmys that “Saturday Night Live” has accrued over its 44 seasons. “SNL” earned two statues on Sunday, one for outstanding variety sketch series and one for outstanding directing.

The final season was widely criticized by fans who felt the pacing and its treatment of previous character developments were not up to par. Still, the show continued to have record-breaking viewership.

Each episode, save for one, topped viewer counts from the season seven finale, which was the series high prior to season eight’s release.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.



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