Friday Follies – The Empire Strikes Back with New Tariffs

Wheee, what a fun ride this is! 

Things were going along nicely for a while but, this morning, China announced they will be retaliating against Trump's tariffs (as opposed to some fantasy World people live in where China takes Trump's crap lying down?) with tariffs on $75Bn worth of US Goods (which the US will pay for, of course) AND a 25% tariff on US autos beginning Dec 15th.  

Don't worry though, Powell is making a speech at 10am from Jackso Hole and it's widely expected he will wave the money wand and "fix" things so we'lll take this pre-market dip about as seriously as we took the pre-market rallies this week – just more nonsens to make the Futures trades money.  Like this morning, we can go long on the S&P (/ES) at 2,900 as it should at least be bouncy and tight stops below the line, of course.  S&P Futures pay $50 per point, so it could easily be good for a quick $500 per contract. 

The same goes for the Russell (/RTY) if it gets back over the 1,500 line – that makes for a good long bet too but only with tight stops below and only looking for a quick gain as it's too risky to hold into Powell's speech as there's little he can do but disappoint as the expectations are widely held now that the Fed will drop rates 0.5% when they next meet on Sept 18th and I don't think that's realistic.

The theme of this year's Fed Conference in Jackson Hole is "Challenges for Monetary Policy" and that seems like a bit of an understatement at the moment and Powelll's speech has the same title so there's not much to do but get ready for 10am and see how things shake out after his speech.  

Have a great weekend, 

- Phil

 

Thrilling Thursday – Markets are Half-Recovered Ahead of the Fed

"Woah, we're half way there

Woah, livin' on a prayer

Take my hand, we'll make it I swear

Woah, livin' on a prayer" – Bon Jovi

It's too early to tell if we'll have to be playing "Stuck in the Middle With You" into the weekend but we're certainly right in the center of the 50 and 200-day moving averages and exactly halfway back from our recent dip from 3,025 to 2,825 at 2,925 so all we can do is sit back and see what happens tomorrow as Jerry Powell speaks to us from Jackson Hole at 10 am.  

The volume has been anemic this week so there are simply no tea leaves to read but, as you can see from the S&P 500 chart, we've fallen comfortably below the 200-day moving average and it is going to take more than lip service to jack the indexes back over the line though it is encouraging to see the 50-day moving average curving up slightly – indicating we could have a sustainable rally if we can keep things together for the rest of the month.

Hussman Margin-Adjusted P/E (MAPE)It's all about Jackson Hole on Friday though all we're really going to get there is more Fed spin and, as I noted in yesterday's Live Trading Webinar, I'm getting more and more inclined to cash out our portfolios while we can as we're finding less and less things to buy and, as value investors – that's a pretty good sign the market is putting in a top – something John Hussman agrees with us on in his August letter.  

As you can see from Hussman's P/E chart, we've now passed the madness of 1999 and miles above where we crashed in 2008 and he has a dozen other charts and graphs to illustrate the point but my point, which I emphatically made yesterday, is that it simply isn't worth…
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Whipsaw Wednesday – Low Volume Futures Rallies Mask Market Losses

Wheeee, what a ride!  

The indexes fell off a cliff in afternoon trading but, not to worry because, as soon as the markets closes, the little manipulator gnomes went right to work and prettied things up for the Asian (9pm) and European (3am) opens – so no one even knew that the US sold off into the close and the total flat-line since 5am isn't the least bit suspicious – just normal human beings trading normally…  Move along – nothing to see here folks…

The stock market is becoming a farce and that makes for dangerous trading conditions so caution is strongly advised.  We are right back where we started the day yesterday so I won't bore you with a repeat of yesterday morning's PSW Report but I will point out that it doesn't count to get over the Strong Bounce lines if you can't hold them for 48 consecutive hours so, according to the 5% Rule™ – we're still not our of the woods on the recent correction.

This afternoon we get the FOMC Minutes from their July 31st meeting (2pm), when they gave Trump a 0.25% cut with Rosengren and Quarles objecting but the Minutes will give us color as to how supportive the rest of the Fed was as it's now widely believed that they will cut AT LEAST 0.25% at the Sept 18th meeting and Trump is asking for a 1% rate cut – which would be uprecedented and unhinged! 

Image result for fed rate cuts 2019Of course, as usual, the markets are reading it wrong and, as usual, traders have absolutely no grasp of history as, historically, the Fed raises rates in a GOOD market and LOWERS rates in a bad market – ESPECIALLY at the top of a bad market as they attempt to forestall a looming disaster so the cut of July 31st was a warning – not a bullish signal!

And notice the key is the Fed generally cuts rates about 5% during a market correction and now we are starting at 2.25% so are we going to go for -3% when the market begins to tumble?  -3% means you get paid to borrow money, which sounds good but no one is actually going to lend
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Technical Tuesday – Markets Pause at Our Strong Bounce Lines

Well, here we are

As expected, we got to our strong bounce lines on yesterday's pre-market rally but then we went nowhere and now we'll have to wait and see if we go somewhere for the rest of the week.  After getting properly spanked by Wall Street for his latest China tweets, the President has been more conciliatory – other than his continued attacks on the Fed, where he is now demanding a 1% rate cut.  That too may backfire as it will be impossible for Powell to please the market with even a 0.5% rate cut and expectations are now over 85% that the Fed will cut at the next meeting.  

As you can see from our S&P 500 chart (SPY), we're at the Strong Bounce Line – which is the same line we've been using all month, predicting both the bottom and the top of the correction.  As you can see, the 50-day moving average is just above at 2,945 and the S&P is at 2,920 this morning and MUST HOLD that bounce line at 2,910, which I think it should do into the Fed.  Our other indexes are also right around their strong bounce lines:

  • 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


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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.

 

 

 

 

 

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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.  

 

 

 

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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