* The market's highs were made early and the low was made late - demonstrating some exhaustion.
* Breadth steadily decayed as the day progressed (At 3:30 pm 1330 advancers, 1630 decliners) See Bob Farrell's remarks on breadth!
* The key feature of the day was the wild rise in bond yields - the largest jump since the 2016 election.
* Bonds got smoked, aiding bank stocks (I reluctantly reduced my outsized weighting of the overbought financial group today) but continued to put a smackdown on utilities and REITs.
* Oil gained (+$0.62/barrel) while gold got hit badly again (-$22/oz).
* FANG led most of the day until the last few hours with Alphabet (GOOGL) up by almost +$30 at its high.  (AMZN) rolled back over, GOOGL lost half of its gain and the worrisome action of FB continues.
* Retail gained back some of yesterday's losses.
* I added to (TWTR) on the Saudi news and downgrade.
* Disney (DIS) up tonite (I remain short). Here is why.
________
Long AMZN, GOOGL, GLD (small), TWTR (large), BAC, GS, WFC, C.
Short TLT, DIS.

I am staying short into the Disney (DIS) earnings release after the close.

I don't expect an upside quarter and I anticipate a mediocre 2020 guide.

From October:

There is probably no franchise or stock as admired as Disney (DIS) .

Day after day, commentators gush optimistically about this familiar name.

I have continued to short more Disney this week -- as the shares of old media continue to make new lows (e.g. CBS (CBS) , Viacom (VIAB) ), making the implied value of the company's new streamlining effort ridiculously high.

As I wrote ten days ago, in "Pressing Disney":

I have reestablished a (DIS) short. Since July, 2019, (CBS) shares have fallen from $52 to $38 (Viacom's (VIAB) shares have had a similar fate). Disney's legacy networks (ESPN and ABC) are losing value at a similar rate. With some conservative assumptions of the parts of Disney's non network properties, the valuation implied for Disney's new streaming effort approximates an inflated $60 billion. This is way too high considering the emerging competition, the weakness in Viacom and CBS stocks.


Here is my short thesis.

Jim "El Capitan" Cramer knocks it out of the park in his column, "It's More Likely Than Not That We've Got a Pangloss Thing Going"

It is a must read.

Source: Lance Roberts

This probably took the market lower:

Breadth turns negative.

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names."
- Bob Farrell

With market breadth flattening out I thought it was a nice time to revisit Bob's rules of investing.

Those that have been subscribers to Real Money Pro for a while already know fully my affection towards (Uncle) Bob Farrell (over the four decades I have been trading and investing) - as these pages are lined with tributes to Bob.

Bob studied fundamental analysis Graham and Dodd and received his MBA at Columbia Business School. But while most were leaning towards fundamentals, Bob turned to technical analysis at Merrill Lynch in 1957 when he determined that there was more to stock prices than balance sheets and income statements.

Over his career, Bob became the preeminent student (and teacher) of sentiment studies and market psychology.

He became my dear friend (h/t to my buddy Merrill Lynch's John Sullivan Sr. who I miss dearly) and an investor in my hedge fund, Seabreeze Partners.

His Ten Rules are an outgrowth of his long career in following the investment markets.

Here is a great summary of Bob's rules:

Markets tend to return to the mean over time.

Translation: Trends that get overextended in one direction or another return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average. The chart below shows the S&P 500 over a 15-year period with a 52-week exponential moving average. The blue arrows show several reversions back to this moving average in both uptrends and downtrends. The indicator window shows the Percent Price Oscillator (1,52,1) reverting back to the zero line.

Excesses in one direction will lead to an opposite excess in the other direction.

Translation: Markets that overshoot on the upside will also overshoot on the downside, kind of like a pendulum. The further it swings to one side, the further it rebounds to the other side. The chart below shows the Nasdaq bubble in 1999 and the Percent Price Oscillator (52,1,1) moving above 40%. This means the Nasdaq was over 40% above its 52-week moving average and way overextended. This excess gave way to a similar excess when the Nasdaq plunged in 2000-2001 and the Percent Price Oscillator moved below -40%.

There are no new eras -- excesses are never permanent.

Translation: There will be a hot group of stocks every few years, but speculation fads do not last forever. In fact, over the last 100 years we have seen speculative bubbles involving various stock groups. Autos, radio and electricity powered the roaring 20s. The nifty-fifty powered the bull market in the early 70s. Biotechs bubble up every 10 years or so and there was the dot-com bubble in the late 90s. "This time it is different" is perhaps the most dangerous phrase in investing. As Jesse Livermore puts is:

A lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Translation: Even though a hot group will ultimately revert back to the mean, a strong trend can extend for a long time. Once this trend ends, however, the correction tends to be sharp. The chart below shows the Shanghai Composite ($SSEC) advancing from July 2005 until October 2007. This index was overbought in July 2006, early 2007 and mid 2007, but these levels did not mark a top as the trend extended with a parabolic move.

The public buys the most at the top and the least at the bottom.

Translation: The average individual investor is most bullish at market tops and most bearish at market bottoms. The survey from the American Association of Individual Investors is often cited as a barometer for investor sentiment. In theory, excessively bullish sentiment warns of a market top, while excessively bearish sentiment warns of a market bottom.

Fear and greed are stronger than long-term resolve.

Translation: Don't let emotions cloud your decisions or affect your long-term plan. Plan your trade and trade your plan. Prepare for different scenarios so you will not be taken by surprise with sharp adverse price movement. Sharp declines and losses can increase the fear factor and lead to panic decisions in the heat of battle. Similarly, sharp advances and outsized gains can lead to overconfidence and deviations from the long-term plan. To paraphrase Rudyard Kipling, you will be a much better trader or investor if you can keep your head about you when all about are losing theirs. When the emotions are running high, take a breather, step back and analyze the situation from a greater distance.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Translation: Breadth is important. A rally on narrow breadth indicates limited participation and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid caps (troops) must also be on board to give the rally credibility. A rally that lifts all boats indicates far-reaching strength and increases the chances of further gains.

Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend.

Translation: Bear markets often start with a sharp and swift decline. After this decline, there is an oversold bounce that retraces a portion of that decline. The decline then continues, but at a slower and more grinding pace as the fundamentals deteriorate. Dow Theory suggests that bear markets consists of three down legs with reflexive rebounds in between.

When all the experts and forecasts agree - something else is going to happen.

Translation: This rule fits with Farrell's contrarian streak. When all analysts have a buy rating on a stock, there is only one way left to go (downgrade). Excessive bullish sentiment from newsletter writers and analysts should be viewed as a warning sign. Investors should consider buying when stocks are unloved and the news is all bad. Conversely, investors should consider selling when stocks are the talk of the town and the news is all good. Such a contrarian investment strategy usually rewards patient investors.

Bull markets are more fun than bear markets.

Translation: Wall Street and Main Street are much more in tune with bull markets than bear markets.

I am hearing a lot of euphoria in the financial media based on this week's market advance.
To some, it is confirmation that a new Bull Market leg lies ahead.
But, no one (I mean no one!) has even observed that the +250 point rise in the DJIA and the 16 point climb in the S&P has been delivered while the market's breadth is exactly flat (with 1460 advancers and 1475 decliners on the NYSE).

Treasuries are getting smoked today. (TLT) is -$3.40/share as the 10 year U.S. note yield is +16 basis points (to 1.97%).
I don't recall this magnitude in years.
I remain of the view that the bond market made a generational low in yields back in June, 2016.
And, I remain short bonds - and expect to be short bonds for the next several years.

CNN's Fear & Greed Index is registering '91' this morning.

Regular readers of my Diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball with Chris Matthews."

So ... "Tell me something I don't know, Dougie."
Negative yielding debt around the world peaked at about $17 trillion two months ago.
It is now down to under $12.5 trillion (as the 10 year French notes turn back to a positive yield).

* Reluctantly and given the strong price performance of the last few months
With the move this week and given the strong follow through today (producing high relative strength readings), I am reluctantly reducing my very large holdings in (GS) , (C) , (WFC) and (BAC) to medium-sized now.
All four stocks are now within 10% of my year end 2020 price targets - making the upside reward v. downside risk substantially less attractive than existed a few months ago.
I will book some very good gains.

A few weeks ago I sold my entire Facebook FB position.
This week I have noted the renewed technical weakness.
That weakness continues today.
We all know the old trading adage, buy stocks that are green in a sea of red and sell stocks that are red in a sea of green.
Enough said.

Banks=World's Fair as the breakout to the upside continues.
Don't chase, though.

* And how can we explain the continued rise in equities in the face of a deterioration in fundamentals? (Read on!)
* Complacency and short term memories (regarding risk) dot today's investment landscape

"Father, father
We don't need to escalate
You see, war is not the answer
For only love can conquer hate
You know we've got find a way
To bring some lovin' here today."

- Marvin Gaye,What's Going On?


Yesterday's opener highlighted Otis Redding (The Man From Macon) and Sam Cooke (The King of Soul) in my column, "Many Have Been Loving the Market Too Long ... They Can't Stop Now."

Today we shift to Marvin Gaye (The Prince of Soul) and his standard, "What's Going On?"

This 1971 hit wasn't the same kind of breakthrough as James Brown's "Papa's Got A Brand New Bag" or Sly and The Family Stone's "Dance to the Music." But it did establish a new kind of adult black pop by bathing Gaye's voice in an almost weightless atmosphere of post-psychedelic rhythm and harmony. "What's Going On" is the matrix from which was created the spectrum of ambitious black pop of the seventies - everything from the blaxploitation soundtracks of Curtis Mayfield to Giorgio Moroder's pop-disco. Not bad for a record whose backing vocalists include a pair of pro football players (Mel Farr and Lem Barney).

But neither its influence nor its role in breaking the grip of the Motown machine is what makes the song great. It's great because its every bit as gorgeous as it is ambitious. After making it, "I felt like I'd finally learned how to sing," Gaye told biographer David Ritz that he taught himself to "relax, just relax," which resulted in a vocal that moves through a dreamscape in which facts and wishes are equally terrible. The song is most famous for attacking war and poverty but it's also an affirmation of love. And that's why, for all its references to long hair and Vietnam, "What's Going On" will never sound dated.

At it's best, "What's Going On" amalgamates soul and Latin jazz, but at times it's so laid back that it approaches Hollywood schmaltz. What saves it then is the unmistakable Motown underpinning that comes from James Jamerson's liquid bass and what might be castanets but could just as easily be fingers popping. All the label's session stalwarts are there and they never played better, maybe because they'd never been so stringently challenged. You don't make music like this unless you are surrounded by love ones.

Released on Motown's Tamla label, Rolling Stone Magazine (in 2004) ranked it as the fourth greatest song of all-time.

It got it's inspiration from Renaldo "Obie" Benson, a member of The Four Tops, after the group's bus arrived at Berkeley in 1969. Benson witnessed police brutality in the city's People Park during a protest held by anti-war activists in what was later called "Bloody Thursday".

Benson said to author Ben Edmunds as he saw the violence, "What is happening here?" One question led to another: "Why are they sending kids so far away from their families overseas and why are they attacking their own children on the streets?"

After discussing the situation with his friend and song writer Al Cleveland, Cleveland composed the song as a reflection of Benson's concerns. Benson wanted to give the song to his own group (The Four Tops) but they turned him down. Benson then presented the song to Marvin Gaye who added a new melody and revised the song by adding his own lyrics. Titling it "What's Going On", Gaye went to Berry Gordy and told him he wanted to record a protest record to which Gory responded, "Marvin, don't be ridiculous. That's taking things too far." When Gordy heard the song he told Gaye that "it was the worst thing I have ever heard in my life."

The song was eventually released without Gordy's knowledge and the rest is history - reaching the top of the charts in one month. The song ultimately sold more than two million copies, becoming then the fastest selling Motown single at the time.

What's Going On In The Markets?

Which brings us to Mr. Market.

How in the face of such uncertainties, weakening global economic growth, political rancor, geopolitical risks, the lack of coordination and cooperation in trade, etc., is the market at an all-time high?

Let's try to answer this question:

* A FavorableSupply and Demand Equation: Since 1999, roughly half of the companies that are listed on the Nasdaq and NYSE are no longer public because of delistings, mergers, takeovers and bankruptcies. Of the remaining still listed companies, over 20% of the outstanding shares have been retired by corporate buybacks.

* A Changing Market Structure That Favors a Bullish Setup: The popularity and explosion in ETFs combined with other passive products and strategies (e.g., risk parity) that worship at the altar of price momentum have been very market friendly. In turn, "fear of missing out" (FOMO) is triggered in a virtuous and self fulfilling cycle as prices rise. In total, over 70% of NYSE and NASDAQ trading is derived from passive strategies. Stock picking by active managers is slowly becoming a "thing of the past." As a consequence, "buyers buy higher and sellers sell lower."

* TheFed and the World's Central Bankers Have Provided Liquidity and Have Delivered Low Interest Rates: Central bankers have forced investors into longer duration financial assets and into more risky investments. We see this in narrow credit spreads and elsewhere (in the favorable pricing of other asset classes). The liquidity provided also allows investors to rationalize higher valuations (as discount models employ the risk free rate of return in calculating intrinsic value).

* Belief in the Fed: As seen in Japan, all that liquidity doesn't always help - but it's sometimes more that the relentless faith the market has in the Fed believing they can cure all ills. (Market participants forget what happened the last two times they were cutting rates.)

* The Knock-On Effects From Low Interest Rates: One of the most important and favorable impact from low rates is that it encourages corporate buybacks (and substitution of equity for debt to finance it). Another market benefit is the advancement in the notion of TINA ("there is no alternative") which argues in favor of equities over low or no yielding fixed income.

* Non-Economic Stock Buyers Bolster Their Share Holdings: Not only are companies large buyers of their own stock but so are central banks and sovereign wealth funds - serving to continue to shrink available company share floats.

* The Belief That a Trade Deal Is a Cure All: Though this ignores the all time high in tension and lack of cooperation and coordination between the G7 countries (as well as the end of the Post World War II economic model/agreement), traders and investors want to believe that President Trump - facing a closely contested November election - will seek a resolution that will improve trade between the U.S. and China as well as with the other countries in Europe and elsewhere.

* Acceptance of Manipulated non-GAAP Earnings over GAAP: While the spread between non-GAAP and GAAP has never been as wide, analysts and strategists (for no clear reason) have adopted non-GAAP in their rationale for currently high valuations.

*Large Hedge Funds Have Virtually Abandoned Short Selling: As the hedge fund community became more concentrated, with the largest fund gaining most of the inflows of capital, many hedge funds came to the conclusion that it would grow more difficult to succeed in short selling as the marginal impact would not be consequential. Some high profile hedge funds simply closed their short books. This development has reduced the "supply" of stock as hedge fund short sellers have virtually disappeared.

* The "Institutionalization" of Hedge Funds: This process has made it nearly impossible for hedge funds to "pig out" or to be truly contrarian - adding to the momentum pressure, the proliferation of "Group Stink" and the overlapping of (long) ownership of the same names.

That is "What's Going On!"

--On Eugene Fama. --What investors can learn from the best poker players.--Interest rates and asset allocation.

Peter Boockvar on sentiment, trade, China and other "stuff":

I'm encouraged to hear that the US/China have laid out a path to rolling back the existing tariffs in addition to not implementing the December 15th ones. But, all we've heard from on this is from the Chinese Ministry of Commerce, not any US official. Thus, details are scant on what the process and enforcement would be on eliminating in tranches the current tariffs on Chinese imports and no timetable was mentioned. Hopefully we'll hear more today. I will say this, China seems to be digging in with its demands that without a rollback of tariffs, there is no deal.

Yields are jumping in response around the world. The 10 yr JGB yield rose another 1.5 bps and is getting near zero again at -.06%. The French 10 yr yield is back above zero, up 5.5 bps to +.02%, the highest since July. The German 10 yr yield is up by 6 bps to -.27% and whose yield is up from a low of -.52% on the day the ECB announced even more NIRP and QE (thus, not working in keeping rates down) and way off the early September low of -.74%. The US 10 yr yield in sympathy is rising 5 bps to 1.88%, just below the highest since August 1st. A 2% yield seems to be where it's going in the short term. I'll emphasize again that the global rate environment has changed notably and I still believe we'll look back on those August yields and the $17 Trillion of negative yielding securities at the time as something we won't see for a long time.

European bank stocks are cheering the rise in rates with a 2.2% rise, the 5th straight day of gains. The index is at the highest since May. Many of these bank stocks are trading well below book value so there is further room to go here.

On the China story, also moving higher is the yuan where the offshore rate is jumping by .6% to the highest level vs the dollar since August 2nd. Copper is up by 1.3% to match the best level since late July. They've pretty much have moved hand in hand over the past year.

We've seen sentiment figures this week get very stretched to the bull side and today's AAII is another indicator pointing to that. Bulls rose to 40.3, the highest since early May, up 6.3 pts w/o/w. Bears fell to 23.9, down 4.5 pts on the week and that is the least since early May. Thus, while we hopefully will get good trade deal news, there already is plenty of market giddiness.

Economic data wise was quiet overseas. After the upside seen in yesterday's German factory orders number for September, today's industrial production figure was about as expected. It was still down 4.3% y/o/y led lower by manufacturing. The Economy Ministry said "The weakness in industry is not yet overcome. But the recent slight improvement in orders and business expectations brightened the outlook for the fourth quarter somewhat." The euro is up slightly and the DAX is outperforming other European bourses.

The BoE left rates unchanged as expected but two members voted for a cut from the current rate of .75%. What they think that would accomplish is beyond me, especially now that a clean Brexit is upon us. The pound is lower on the dissents but I don't expect a rate but anytime soon because Brexit will likely be resolved soon.

Two former Twitter (TWTR) employees have been charged with spying for Saudi Arabia.
The shares are lower in premarket trading.

Danielle DiMartino Booth explains why industrial stocks are sales/shorts this morning:

• Industrial equities are not pricing in the higher labor costs reflected in Productivity and Costs; Q3 labor costs rose nearly 5% year-over-year which should be discounted in industrial equities, but the labor cost pressure is not being fully priced in by the market
• The ISM Employment-Production spread proxies manufacturing labor cost growth; the spread has increased to 1.5 points, which is the widest in eight years meaning costs have become debilitating on a historical basis
• S&P Industrial earnings are projected to contract 4.5% in the fourth quarter coupled with expectations of higher manufacturing labor costs; the time is likely upon us to lock down profits in Industrials or enter short positions

There are certain children's games that span multiple generations. Leapfrog is one of them. Who hasn't crouched into the squatting position only to uncoil and vault over your friend's back just to have them reverse roles? As cumbersome as it might have been in the garb of the day, Leapfrog dates back to the sixteenth century and plays like the Disney ride, "It's a Small World."

In France, it's called saute-mouton, or "leapsheep." The Romanian version is dubbed capra, or "mounting goat." Indians call it Aar Ghodi Ki Par Ghodi, or "horseleap." The Italians termed it la cavallina, or "small horse." And the Dutch had two names, bokspringen, "goat jumping" or haasje-over, or "hare-over."

No matter what your native language, Leapfrog brings back memories of the innocence of youth. That connotation morphs markedly in financial news when one story clears right over the last, shifting the narrative in the process. Within days, copycats surface. The latest case in point to hit Bloomberg this past Tuesday: "Worst May Be Over for Global Economy Amid Signs of Stabilization."

The headline was written to invoke optimism, leading us to believe the press is thirsting for feel-good material. Consider this excerpt from the article: "Among the reasons for confidence: While JPMorgan Chase & Co.'s global manufacturing index [PMI] contracted for a sixth month in October, it inched closer toward positive territory as both output and orders firmed."

The headline index printed at 49.8, a hair's breadth away from the expansion/contraction 50 line. Or, put simply, it contracted again.

The result summoned the proverbial refrain that things are getting "less bad!" If you don't wear rose-colored glasses, less bad news is still not good. That said, less bad is good enough to instill hope. All we need is a two-tenth's gain in next month's global PMI to solidify today's expectations that the industrial recession has ended.

Stock investors have already sniffed out this turning point, at least tentatively. After the less bad global PMI news, the S&P 500 Industrials index closed 12.6% higher compared to a year ago on Monday. Rewind a month to the last global PMI report, and the twelve-month performance was -2.2% year-over-year. Score one for trade war progress?

Cycle chasers don't pursue idiosyncrasies. In our estimation, industrial equities are defying the fundamental opposition presented by the higher labor costs in yesterday's Productivity and Costs report. Set the headline nonfarm figures aside and focus your attention on factory sector labor costs (the blue line above). The third-quarter acceleration to a near 5% year-over-year rate should -- operative word -- brake industrial stocks' gains. In fact, manufacturing labor cost inflation is at a cycle high. Maxed-out industrial labor cost pressures were endemic of late innings in past cycles. They manifest in profits.

Speaking of which, Profit = Price - Cost. Employing this simple rule, profit proxies equity performance. Ergo, higher labor costs put pricing power to the test, which in turn challenges equity performance. Look no further than the September PPI for validation as manufacturing output prices, those charged at the gate, fell at a 1.3% annual rate.

Lest you think there's any gray area, let us spell it out for you -- manufacturing profits are getting squeezed by higher labor costs. Throw in higher tariffs in the supply chain -- an uncontrollable cost -- and industrials are taking cost hits on two fronts without the ability to offset via higher prices.

Since labor cost data are reported on a quarterly basis, we use ISM's monthly data for interim guidance. The ISM Employment-Production spread acts as an approximation for manufacturing labor cost growth and provides direction on the S&P Industrials index. The loud and clear is that further cost pressures are building; the 1.5-point spread so far in the fourth quarter was the widest in eight years.

We would be remiss to not include that manufacturing globally has been swept up in the happy narrative. Things are bottoming is the meme. The catch worldwide is the same as it is stateside -- the bleed to services is undeniable. This is from IHS Markit's global composite index which catches both manufacturing and services in its net: "The slowdown in growth was mainly centered on the service sector. Although services continued to outperform manufacturing, its pace of output expansion was the weakest in over three-and-a-half years."

Can the trade war also save services? Hopefully, given investors treat the trade war as the only news that matters. It follows that news that the Trump-Xi summit is being pushed to December twisted investors' drawers.

The bulls would prefer to leapfrog each other to new records for the S&P 500. The reality is S&P Industrial earnings are projected to contract 4.5% in the fourth quarter, another fundamental reason to either take profits in Industrials or enter a short position.

Futures are higher on word that the U.S. and China have agreed to phase out tariffs.