Monday Market Movement – Up We Go Again

Image result for fed money printingTrump says we're "talking with China" and that's all it takes.

The Dow is up 300 points (1%), pre-market, as are the other indexes but I think it's the Fed's Jackson Hole Conference everyone is looking forward to as the rumor is the Fed is going to give us MORE FREE MONEY!!! – and we do love MORE FREE MONEY!!! – don't we?  Not only are hopes high for Jackson Hole (Friday and over the weekend) but Asian Central Banks are expected to be easing as well and there are rumors that even fiscally conservative Germany is now talking about Government stimulus to boost the economy.

It's a very big deal if even Germany is going to start stimulating the economy – that should be enough to boost things though it's all rumor at the moment and why these Governments are in such a panic to support markets at or near their all-time highs is a bit of a mystery – because they already have negative interest rates and low unemployment, which means they have very little room to move if we do get into a real recession and, if you don't act during a Recession – things can get Depressing!

Weak economic data from Germany and China last week triggered a stock-market selloff and a bond-market rally, with yields on 30-year Treasury bonds falling to their lowest levels ever. The reaction illustrated the growing sensitivity of investors to worries about trade tensions and global growth.  Unfortunately, Trump only used the last Fed Cut to launch additional tariffs on China, which are the real problem and, if the Fed gives Trump more cuts at the Sept 18th meeting – that might be the signal for Trump to attack China again – and that's the real catalyst that's spooking the markets.

Still, for now, like last week, the Fed is generally quiet and the markets can run back up on rumors.  Only Randy Quarles speaks at 6pm tomorrow ahead of Powell's big speack from Jackson Hole Friday morning and it's a fairly light data week so not much to stand in the way of a good economic rumor as we bounce back towards recovery.


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TGIF – The ECB Takes a Turn at the Stimulus Wheel

Image result for ecb stimulusMore free money!  

That's what's got the markets rebounding this morning as the European Central Bank says they are preparing a "very strong package" of stimulus measures for its next policy meeting in September.  Speaking in his offices in Finland’s capital on Thursday, Olli Rehn said the slowing global economy would see the ECB rolling out fresh stimulus measures that should include “substantial and sufficient” bond purchases as well as cuts to the bank’s key interest rate.

“It’s important that we come up with a significant and impactful policy package in September.  When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”   

ECB President Mario Draghi last month raised the prospect of fresh ECB action in September, but the new comments from Mr. Rehn indicate that the level of stimulus is likely to be at the upper end of analysts’ expectations.  By raising market expectations for the ECB’s September meeting, Mr Rehn’s comments could put pressure on any ECB policy makers critical of a large stimulus package to fall into line.

 

 

 

 

 

IN PROGRESS

 

Thrilling Thursday – Markets Yanked Around by Every Rumor

Wheeee!  What fun!  

At the moment, the Dow (/YM) Futures are up 200 points after being down over 100 points.  The downturn was caused by China threatening to escalate the trade war (yet again), with the Minister of Finance saying that China "would take necessary countermeasures" against any new US tariffs and said the new tariffs "seriously violated the consensus" that Trump and Xi has come to at the G20 meeting.   China meanwhile injected $2.4Bn of stimulus into Hong Kong and then said that Trump and Xi were engaging in phone meetings – flipping the Futures back up.

WalMart (WMT) had good earnings and positive guidance this morning and they are adding 50 points to the Dow by themselves with a 6% gain pre-market but I seem to remember WMT doing well in the last recession as more and more middle-class shoppers looked to cut costs so I'm not sure if what they see as a positive trend is really a positive for the US economy.

Meanwhile, remember that big blue line we drew on the S&P chart two weeks ago with bounce lines predicting the future action of the index?  Well we're still there:

We discussed the 5% Rule in yesterday's Live Trading Webinar as well as our hedges and, at the time, we decided not to get more aggressively bearish, despite the TERRIBLE DAY the market had yesterday, as we are pretty well-balanced and the situation is extremely difficult to predict – so why bet bearish when we are comfortably neutral?  2,880 is the weak bounce line on the S&P Futures (/ES) and we failed that so my note to our Members after the Webinar reflected what I said at its close:

So ugly.  Failed the weak bounces, looks like we're on the way to 2,700 (10% total corrections).

25,500, 2,850, 7,500 and 1,465 are the lines to watch, shorting the laggard if 2 go below and out if any get back above after that


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Which Way Wednesday – Recession Worries

Now, where was I?

Before we were so rudely interrupted by yesterday's "rally," I was pointing out how there are simply too many macro fears to shrug off and get bullish.  Despite the 70-point S&P stick on China "news" that we'd be having a phone call with them in September, I remained skeptical and we took advantage of the rally to begin closing out some long positions in our Options Opportunity Portfolio, turning it a lot more bearish.  I had, in fact, said to our Members right at 9:56 am, in our Live Member Chat Room:

LOL, what a rocket on China Trade news!  How silly…

So hard to take this market seriously when it goes up and down 5% based on whether or not we're going to speak to China on the phone in 2 weeks.  It's like High School!

The market has, indeed, turned into more of a popularity contest than a true measure of economic activity.  The Administration has learned how they can talk the market up or down at will but, as we just saw yesterday – it's a short-lived thing when there's no meat on the bone to back up their statements.  Tartiffs are only delayed until Dec 15th after massive blowback on Trump's announcement last week and the "phone call" to China was nothing more than a face-saving attempt by the Administration so Trump could avoid saying he screwed up and misjudged how badly the market would take new tariff announcements.

Image result for trump report card cartoonThe delayed tariff date will also boost orders into the holidays and give us a better Q4 than we probably would have had as people rush to beat the tariffs with their orders.  That's something that will blow back on us next year, but Trump won't have to run on next year's GDP as it won't be over by the election so this year is his "report card" and, like his school career – the President is willing to cheat to get a C.  

 

 

 

IN PROGRESS

 

Tumblin’ Tuesday – Back to 2,880 Again

A bit of a roller-coaster, right?

Since we posted this chart last week, we've been right in the range predicted by our 5% Rule™ and, unfortunately, that means we're likely to test 2,850 again and likely to fail it on the way down to 2,700 at the moment, we can blame escalating trade tensions between the US and China or, as noted yesterday, the Hong Kong protests which Cramer now says are serious (since reading my report) and, of course, yesterday, the Argentine Stock Market fell 48% in a single day – something that's got to make investors in the Developed World Markets reconsider the lofty valuations they are paying for stocks in countries run by tyrants-in-training.

I have been warning people to stay away from Argentina since 2013, when the index first spiked up to ridiculous levels and we had a correction but then spiked to even more ridiculous levels but now Argentina has given up all those gains and more and it's still a stay-away country with a President who lost an election and refuses to leave office (shades of futures past for the US?) and a bond market that's showing a 72% chance of default within 5 years – 50% higher than the chances were on Friday.

And this is why we told you to stay far away from 100-year bonds:

Meanwhile, Argentina is only one of many things on the Global Radar we should be paying attention to and, quite simply, when there are a lot of macro issues to be worried about – we should be a lot less willing to pay higher forward multiples for stocks – in case one of those issues becomes a bigger problem than it is now.

ImageAs you know, the bond market is already pricing in a Recession with the inverted Yield Curve, Germany and South Korea are both very close to recessions already, with almost no growth in the first half and Global Industrial Production and Manufacturing is also very near the contraction line below 50.  Trade Growth is, of course, negative and not looking like it's going
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Monday Market Mayhem – Hong Kong Protests Shut Airport, Spooks Investors

China is boiling over.

The Hong Kong Airport was shut down today, culminating 10 weeks of unrest as the protests grow stronger and stronger over China's attempts to exert more authority over the former British territory.  Oddly enough, this is something we thought would happen over 20 years ago, when Hong Kong was first handed over but the Chinese Government is very good at being patient before applying pressure – a lesson Trump is only just now beginning to learn.

Beijing cranked up the warning rhetoric on Friday aiming to put a halt to protests ahead of the weekend but it only intensified the situation and protests turned violent on Sunday with dozens of arrests in numerous clashes with the police.  Late Sunday afternoon, thousands of protesters descended on tourist destinations and residential neighborhoods alike, building metal barricades and some throwing bricks and what police identified as smoke bombs.   

Hong Kong Airport is one of the World's busiest, with hundreds of flights each day, it's closure disrupts a lot of business in Asia and, long-term, if people begin to feel they can't rely on it, there could be major economic repercussions.  

We are outraged by the violent protesters’ behaviors, which showed a total disregard of the law, posing a serious threat to the safety of police officers and other members of the public. We severely condemn the acts,” the government said early Monday. In recent public appearances, Hong Kong’s leader, Carrie Lam, has said the government can’t accede to the protesters’ demands.

Meanwhile, over the weekend, Trump indicated he is "not ready" to talk to China in September, likely pushing off any possible progress in the trade dispute into next year.  As I keep saying, Trump loves his tariff slush fund and is very unlikely to give it up and he feels the Hong Kong situation is weakening China, so Trump is more likely to increase the tariffs than call them off next month.

 

 

 

IN PROGRESS

 

 

 

 

 

50% Friday – Indexes are Halfway to What?

So far, so good.

In the past 3 days, we've taken back 50% of the drop that we had in the prior 3 days but, if you think about it, that's not as strong going up as it was coming down and certainly the volume is fading with just 85M shares traded on the S&P ETF (SPY) yesterday vs 142M shares last Thursday (1st) on the way down.  Total down volume for the 2nd, 3rd and 4th was 438M shares while total up volume for the 5th, 6th and 7th was 346M shares so 1/4 less shares traded with 50% less results.

What that means, in a nutshell, is there was a net exit of cash from SPY and, so we infer, from the entire market and that's like letting the air out of a ballon (or, in this case, a bubble) – it's simply not able to get back to the way it was before.  That's why the 5% Rule demands symmetry, you need to rise as fast as you fell or we're still in danger and, since we're going into the weekend – we'll be adding back some hedges in the Short-Term Portfolio as we lightened up when we crossed over our Strong Bounce lines (which are all green at the moment). 

 

IN PROGRESS

 

 

Thrilling Thursday – Strong Bounce Lines Tested

We're making some progress.

As we noted yesterday, we were looking to take back 2,880 on the S&P 500 and we finished at 2,884 and our next goal is the strong bounce line at 2,910 – after which we can put this weakness behind us and get back to our rally – because nothing that happened last week to cause the sell-off matters this week, I guess

Our bounce lines remain:

  • Dow 25,000 is the mid-point and bounce lines are 25,550 (weak) and 26,100 (strong)
  • S&P 2,850 is the mid-point and bounce lines are 2,880 (weak) and 2,910 (strong)
  • Nasdaq 7,200 is the mid-point and bounce lines are 7,360 (weak) and 7,520 (strong)
  • Russell 1,440 is the mid-point and bounce lines are 1,472 (weak) and 1,504 (strong) 

We made good progress yesterday, flipping the Weak Bounce Line on the S&P green along with the Strong Bounce Line on the Nasdaq and the Russell is right on the Strong Bounce Line at 1,503 this morning, so we turn that black.  That's all we need to do to see if we are moving in a healthy or unhealthy direction.  

Yesterday's move up came courtesy of Chicago Fed Governor Charlie Evans who said: "As long as inflation continues to behave the way it has, I think we have capacity to pursue these accommodative stances in support of the economy and sustaining the expansion and maximum employment.  There is a role for risk management, and you could take the view, as I have, that inflation
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Wednesday Weakovery – Indexes Fail to Bounce, Held Back by Weak Earnings

2,880.

That's the weak bounce line on the S&P 500 and, as we predicted in yesterday morning's report, that's right where we ended up, though it was only due to a "stick save" into the close, which popped the S&P up to 2,881, but this morning, when we're back to 2,861 because that 20-point afternoon surge was nonsense – meant to entice retail traders into buying the dips (while the big boys sell into the bounces).  

That's what our 5% Rule™ is for – to prevent us from chasing false rallies or panicking over normal corrections.  The 5% Rule™ works best when bots are doing most of the trading and that's a trend that's worked well all decade and should continue to do so as we begin to look forward to the next decade as well.

Yesterday morning, in our Live Member Chat Room, we calculated the bounce lines for the other indexes as well so, to summarize here (green or red determined by Futures at 8:30 am):

  • Dow 25,000 is the mid-point and bounce lines are 25,550 (weak) and 26,100 (strong)
  • S&P 2,850 is the mid-point and bounce lines are 2,880 (weak) and 2,910 (strong)
  • Nasdaq 7,200 is the mid-point and bounce lines are 7,360 (weak) and 7,520 (strong)
  • Russell 1,440 is the mid-point and bounce lines are 1,472 (weak) and 1,504 (strong) 

Before we had our Big Chart (thanks StJ), we just had the little spreadsheet in the corner of the Big Chart and that's really all you need to gauge the health and we simply count the red and green boxes and, if things are getting redder, the market is getting weaker and if things are getting greener, the market is getting stronger and anything that happens in-between those lines is meaningless.  

Of course, the above bounce lines are just measuring the short-term action but we also apply them to weekly and monthly charts so we are able to plot our trading ranges over years of time.  Another big factor in why the 5% Rule™ is so accurate is because, at the heart, it's based first and foremost of the FUNDAMENTAL
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Tricky Tuesday – Weak Bounces Look Like Rallies After Such Big Drops

Don't be fooled.

Yesterday, at 3:25 pm, in our Live Member Chat Room, I said we are very likely on the way to 2,700 on the S&P but, before that happens, we were very likely to get at least a weak bounce:

I think we'll have to wait for 2,700 on /ES.  If 2,850 is halfway down from 3,000 (5%) then we're looking for 30-point weak bounce to 2,880 and strong would be 2,910 but that's not likely if we we're heading lower so look for a failure at 2,880 and then follow-through below 2,850 over the next few days.

As you can see on the chart, we ended up just under 2,850 at 2,844 and this morning the S&P has bounced to 2,856 after falling to 2,775 overnight.  That movement doesn't matter, what matters is how we trade once the volume picks up and our 5% Rule™ tells us that we should expect a 20% retrace of the 150-point drop from 3,000, so that's 30 points (green weak bounce at 2,780) and, if that fails, then it's very likely we are on the way to 2,700, which becomes a 300-point drop and then the bounces we expect double to 60-points (red weak bounce at 2,760).

This morning, the talking heads on the MSM are saying we are bouncing because China didn't devalue the Yuan as much as feared but that's not the real reason we were dropping, that was the White House spin on why we were dropping to deflect the blame away from the President and his idiotic tariffs and yesterday, the US branded China a Currency Manipulator – further escalating trade tensions and making it less likely we'll be coming to an agreement – there's nothing bullish about that.

In addition to the currency move, Beijing said that Chinese companies had suspended purchases of U.S. agricultural products, and that the government has not ruled out putting tariffs on U.S. farm goods purchased after Aug. 3rd.  China’s Central Bank said Monday’s depreciation was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.” People’s Bank of China Governor, Yi Gang, said that China
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