Bulls Cede Control from Bears

Friday was a very good day for the bulls on the heels of a little reversal on Thursday that pierced the recent lows on the Dow, S&P 400 and Russell 2000. While I would have preferred the S&P 500 and NASDAQ 100 to have joined that party to run the weak money out of the market, it’s not the end of the world.

You can see what I am talking about below in the lower right side of the chart of the Dow.

With the bulls having fended off the bears for now, the next key price area will be around 26,450. The Dow and its index cousins all need to close above their recent rally highs to really confirm the worst is behind us and all-time highs are up next. At this point, the bulls have the ball, but I don’t have very high conviction that stocks will scream to new highs. As I said last week, even though the decline did not look complete (it did after Thursday), in this case, I was okay being a little early than late given the relative shallowness of the decline.

Now, I am looking for leadership. Semis have and continue to step up which I love. The other key sectors have a lot more work to do. Defensive groups continue to trade at or near all-time highs, which has really been the case all year as the economy has weakened. Let’s see what high yield bonds do the rest of the month.

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Bear Clowns Wrong, AGAIN – Dow 28,000 on the Way

The news backdrop certainly isn’t good. Trump adds tariffs. China threatens retaliation. Hong Kong protests. China readying to “invade”. Germany and Italy in recession. Yield curve inverts in U.S. Recession fears explode higher. All of this sounds so bad. Like there is no hope, just darkness.

Yet stocks are merely 6.5% from an all-time high. 6.5%!

I will go one step further. News like I mentioned more often occurs as the stock market gropes for a bottom than puts in a meaningful peak. News like this creates fear, not greed and fear is the emotion that happens during market lows, not near highs.

The S&P 500 has pulled back 6% on a closing basis since its last all-time high on July 26, just like it has done more than 30 times since 1950 (5-9.9% pullback). Yet, the vast majority of what I am watching, hearing and reading is making people feel a whole lot worse and believe that stocks are down more than 10%. As usual, the data do not support the conclusions of the masses.

Additionally, short, sharp declines from all-time highs are not how bear markets usually begin and that’s not what we saw in 2007 and 2000. Short, sharp declines from all-time highs are typically recovered from in less than two months.

With all that said, as I type this, I do not believe the final low is in just yet for stocks. However, as I said on multiple TV programs this and last week, I didn’t think it paid to be too cute here. In this case I wanted to be positioned a little early than a little late. Most or much of the price damage has already been seen, but the decline does not look perfectly complete right now. While that could change very quickly, Dow 25,000 or even 24,500 wouldn’t not be a shock as I have written about for the past few weeks.

Lots and lots of people watch the average price of the last 200 days as a gauge of the market’s overall trend. Some say it’s a self-fulfilling prophesy when price gets close as humans and the computers push it to the finish line. Below you can see the Dow and S&P 500 with the pink line representing the 200 day moving average.

Over the past 19 months we have seen a number of times, especially on the left side of each chart where price came down to kiss the pink line and then rally. However, we also saw last fall where that long-term gauge of trend did not hold. On the right side of each chart, you can see the Dow saying hello to the pink line right now, while the S&P 500 remains a bit above it.

The bottom line is that in the strongest markets, price normally holds at or around the pink line. Conversely, in the weakest markets, rallies are capped at or near the pink line on the way back up.


When looking for opportunities today, a barbell approach, usually reserved for bonds, is one that makes sense to me. By barbell, I am looking for some less volatile sectors on the left side and some more volatile sectors on the right side. Staples, REITs and utilities would fill the left while semiconductors would fill the right. Right now, I am not all that interested in things like industrials, materials, energy (although it should see a big bounce soon), biotech, retail and banks (although diversified financials look much better).

Finally, and the answer to the question everyone keeps asking over and over again, the bull market remains intact and will need to see at least another fresh, all-time high before the possibility of a bear market enters my thinking. There are too many positives and not enough serious warning signs in the financial markets to build the foundation for a bear market, no matter how many people are hoping and praying for one for some moronic reason.

The bear clowns are alive and well in the media and on Twitter, still beating their chests for the 10th straight year. Their wildly negative, gloom and doom forecasts sell well during interviews and scare the masses, but have done nothing to help investors make money. This bull market remains the most hated and disavowed in history and until the retail public returns to invest, stocks will move higher on balance.

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I HATE Tariffs

I hate tariffs! I hate tariffs! I hate tariffs!

PHEW!

Now that I got that out of the way, I can get down to business. I really hate the idea of tariffs. The free market should be the ultimate arbiter, absolutely not the global governments trying to protect certain industries. And as I have said over and over and over, no one, not a one, wins a trade war. There are only losers.

You can only put so much lipstick on that pig. Tariffs are either borne by the consumer or the producer, but tariffs are just a fancy word for taxes. The consumer can pay more for a good which is inflationary or the producer can absorb that cost which impacts their bottom line. And anyone who thinks the U.S. is guilt free is just dead wrong. How do you think our light truck industry became so dominant for Ford and GM?

What also bothers me is the President’s tactics of the on again, off again tariffs which serves no one well. Literally, on any given second, a random tweet can hit Twitter and the global markets see instant outsized moves. And let’s not forget that the Chinese are masters at manipulating their currency. In this regard, they have weakened the Yuan to help offset some of the tariffs.

If I were China, I would continue to massage the Yuan and always be open to calls, meetings and negotiations, but there is no way I would make a deal with U.S. before the 2020 election. What’s the motivation? The Chinese economy is already in the toilet. President Xi is basically president for life or until he decides he’s done. The Chinese people won’t demand anything on this front. Xi is smartly playing the waiting game and hoping he gets to negotiate with another resident of the White House. And if Trump wins, Xi already knows who he is dealing with.

Many people have asked what the U.S. should do instead of imposing tariffs. How should we combat intellectual property theft? While an excellent question, there really is no good answer. I do not think China will ever agree to help the U.S. combat IP theft. We could fight it out at the World Trade Organization, but that’s a lot of time without much reward.

The long-term “hope” is that the free market would eventually move manufacturing from China to other nations and that would help level the playing field, but not solve all of the problems. Additionally, unless the Chinese allow their currency to free float, it will never, ever be considered a reserve currency that the world must use. Eventually, the Chinese know that having a reserve currency trumps everything else.

President Trump has come out with some really good economic policies, like cutting more than 400 regulations and overhauling the tax code like Presidents Reagan and Kennedy before him. I supported these because they had a direct positive impact on the economy for everyone. Trump’s policies toward China are misguided from my seat and will only end up damaging our economy. Some believe that Trump knows this, but is also counting on the Fed to continue to cut rates. That’s a dangerous game, especially once the economy rolls over.

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Nope. Not a Bear Market

As I continue to write about, while much or most of the price damage should be over, day to day volatility is not. Worries have shifted from tariffs and a trade war to civil unrest in Hong Kong which is also associated with China. Remember, regardless of the situation, there is always, always, always “major” news surrounding a market’s attempt to bottom. That’s just how it is.

It seems like every single time stocks pullback at least 5%, I get hit with questions and proclamations about the bull market being over. The bears start pounding their chests and telling me how wrong I am while the bulls get anxious and worry about the downside. Then the bottom comes. I haven’t wavered once in 10 years that I thought higher prices would result from whatever decline was unfolding and I am not changing that tune here.

The data do not support a bear market beginning.

However, that doesn’t mean that one is impossible, just very unlikely. I will be doing my canaries in the coal mine issue of Street$marts shortly to review the various markers for a bear market to begin. For now, as I mentioned on Making Money with Charles Payne last week, I think last week’s lows represent much or most of the price damage for this pullback although I would not rule out a quick breach of those levels later this month.

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Stocks Thrashing Around for a Bottom But Other Markets Hold Clues

Volatility happens in both directions. That has been the theme all week. Anyone who has bought strength or sold weakness has been left holding the bag. And I don’t think volatility is over, but much or most of the price damage should be. Worst case, as I have written, Dow 25,000 or so could be seen. The reward is a move to 28,000.

With stocks thrashing around trying to find a low, I often look at other markets for signs of confirmation. The bond market has been the primary beneficiary of the stock market pullback. It certainly looks like bonds saw an emotional peak on Wednesday morning. Gold also saw some type of peak on Wednesday although it may not be as consequential.

Crude oil has completely fallen out of bed and that may be a more important canary than anything else right now for global economic growth. While the commodity is very volatile and prone to external factors influencing price, I am always concerned when I see it fall hard. However, it probably provides more false warnings than real ones.

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Hold on to Your Hats

As you know, volatility rarely builds slowly. It typically happens all at once. I went to bed last night and saw overnight trading indicating a lower open by 100 Dow points. When I woke up, that had shifted to up 100 Dow points. I showered, got dressed and ate breakfast. The Dow was then indicated to open lower by 300 points as global bond yields collapsed.

Why do we care about this?

Lower bond yields are mostly indicative of weakness in the economy, however contrary to what you may hear or read in the media, this is not an absolute. The modern generation low took place in July 2016 when the economy was nowhere near teetering on recession. It’s really the outsized moves we are seeing today that is causing angst and volatility as these moves lead to dislocations and forced movement by big money.

Stocks bounced back decently on Turnaround Tuesday to stem the tide. I still think, as I wrote last week, that Dow 25,000 or so is the downside risk. When this pullback is cleaned up, my forecast remains for another run to all-time highs. Perhaps that run will yield cracks in the pavement and a crumbling foundation to lead to more significant downside, but it’s not worth anticipating. This has been the single most hated and disavowed bull market of all-time and we continue to see the masses turn negative during every single decline.

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Here We Go Again

It’s been a tough three days for the bulls that is about to get worse as China retaliated for Trump’s tariffs with a series of their own. Their currency, the yuan, also fell below what analysts have deemed “critical” levels. It has long been argued that by weakening their currency, China has been able to partially offset the impact of the tariffs.

I won’t get into another diatribe about how I detest and hate using tariffs as part of economic policy. It’s flawed and failed thinking where they are only losers. No one wins a trade war. The Chinese have patience on their side as they can just wait for the 2020 election and hope they negotiate with another administration. They already know the worst case scenario.

Trump on the other hand will have a tough time over the next 14 months as the economy will weaken. However, he will very artfully pander to his base and blame the Fed for not lowering interest rates quick enough. One thing is for sure, it won’t be quiet.

Last week, I wrote about two price levels on the Dow that were key, 26,400 and 25,000. The former was breached and held on Friday, but given the weakness overseas, our markets are looking more than 1% lower this morning. As you know, it’s more important where they close than where they open, but today is setting up to be an ugly one for the bulls.

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Economic Reports Overshadowed by Trump & Powell

It’s been quite a week! Lost in the Fed and tariffs headlines has been three important economic reports that lead to a conclusion as clear as mud. The Chicago Purchasing Managers Index cratered to under 45, signaling trouble in the manufacturing sector. However, this number does have the importance it once did as the economy is only about 12% manufacturing these days.

We also saw Consumer Confidence soar in July to just shy of an all-time high. That’s a little bit of a surprise to me, especially with the Fed cutting rates. This morning, the government released the July employment report which came in as expected. Wage growth was slightly better than expected,  but the average number of hours worked each week softened. 370,000 new workers came into the workforce, a good sign.

In my view, the economy is softening, but not on the verge of recession just yet. I continue to absolutely hate what President Trump is doing with tariffs and tweets and I do think it will impact the economy, just not to the degree of China’s. No one wins a trade war. No one wins a trade war. No one wins a trade war. Was that clear enough? And I think Xi and the Chinese have more staying power.

As the calendar turned and it’s now August, stocks have not performed well in strong and weak markets this month. Between the Fed and Trump’s new tariffs, the bulls are definitely on the heels to begin the month. The first stop should be Dow 26,400 and then below 25,000 if the bears gain total control. For now, you have to expect the bulls to mount a rally next week.

 

 

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Powell’s Arrogance & Ignorance to Continue – Here Comes the Cut

What to Expect Today

Let’s get the worst kept secret out of the way. The FOMC is going to cut interest rates today by 1/4%. I don’t know of anyone who doesn’t believe that short-term rates are going down today, regardless of whether they agree or not. The big question is going to be what Powell says after that. Is this an “insurance” cut as in one and done? Or, is it the beginning of a rate cut cycle like we saw in 2007 and 2001? The last two cutting cycles began with 1/2% cuts and as we know, ended very poorly for the economy and especially the financial markets. I would be very surprised if the Fed cut by 1/2% today and frankly, a little more than concerned. Today’s cut is most similar to July 1995 when stocks were also at or close to all-time highs, but the economy then was stronger and inflation and unemployment were much higher.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks near all-time highs and significant upside progress over the past two months, the bulls have even less dry powder than normal.

Given Apple’s earnings beat last night and other positive reports, I can certainly make the case that the easy money will be made from last night’s close to 10:00 am today. Finally, although not conforming to any special Fed day trend, I am certainly aware that any short-term rally may be sold, either from Jay Powell’s comments or just routine, sell the news, profit taking.

Jay Powell’s Arrogance & Ignorance

As I already mentioned, everyone knows what the Fed is going to do at 2:00 pm today. That’s not in debate. And right now, the market is pricing in at least another two rate cuts. Long time readers know that I have been very critical of the Fed, more with Yellen and Powell than Bernanke although Big Ben did make perhaps the single greatest imbecilic comment in 2007 when he said the sub prime mortgage crisis was “contained” and there would be “no contagion”. It would be impossible to have been any more wrong than that and on an epic scale.

Anyway, I think the Jay Powell led Fed is among the worst groups since 1988 when I entered the business. Greenspan may have been the worst Fed chair since Arthur Burns in the 1970s but Powell is certainly working on his legacy and it’s not an enviable one.

For 6 years I have pounded the table that raising interest rates AND selling assets which is now being referred to as quantitative tightening is the mistake of all mistakes. Selling assets is akin to also hiking rates as it reduces liquidity and tightens financial conditions. Janet Yellen should have chosen one or the other. Pick your poison. Instead, she forged ahead with both.

Jay Powell continued on that path except he, in a grand stroke of additional arrogance, decided that rates should go up at a quicker pace. Arrogance and ignorance are among the two worst character traits and I think Powell has them both. We all saw what happened last December when the Fed added that one additional rate hike and did not temper the asset sales. The global financial markets collapsed like hadn’t been seen since the Great Depression.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Remember, the Fed doesn’t want to upset the financial markets. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy with out. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did., A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

So, the second half of the dual mandate is certainly amenable to a rate cut. You have the dual mandate at odds. In my world, that would mean a neutral stance by the Fed. Leave rates unchanged and stop selling assets. Let things be for now.

Jay Powell & Company at Odds.

Jay Powell and the majority of the voting members of the Fed want to cut interest rates by 1/4% or 1/2%. There is a minority faction that wants to leave rates alone. Powell has spoken about an “insurance” rate cut. He discussed weakening economies in Europe and Asia that eventually could impact the U.S. I just want to know where in the dual mandate it says that the Fed should worry about China and Europe. The rest of the world is now seeking to loosen financial conditions so now Powell wants to follow them.

The markets are expecting 1/4% cut. One of the many great charts and work that Tom McClellan does has to do with forecasting a rate move based on the two-year Treasury Note. Below is a chart of that instrument overlayed with the Federal Funds Rate which is the actual interest rate the Fed controls. Tom argues that all the Fed needs to do is follow the two-year Note instead of meeting and debating all the time. His analysis certainly has merit.

When the solid black line is below the colored line, the Fed is allowing easy financial conditions. The reverse is true when it’s above the colored line. Right now, the two-year Note (the market) is telling the Fed to cut rates. While I believe it’s premature, the market does not.

What I Would Do

While I could go on and on and on as I sometimes tend to do, I am going to wrap this up by saying that Powell is going to hide behind tariffs and China as the reason to cut rates today. Although I absolutely do not think he will intend to poke the President, I do think that labeling tariffs as the potential economic weakness culprit will certainly tweak Donald Trump.

My own economic forecast remains unchanged since I first offered it in late 2017. I think the U.S. will experience a very mild recession beginning before the 2020 election. Although there are so many doom and gloomers who forecast something much more ominous, it’s almost impossible with the banks in such great shape, literally sitting on more than two trillion dollars in cash. And if you want to know what I would do instead of cutting rates, I would stop paying the banks to keep their excess reserves at the Fed. This would force them put some money to work in the economy.

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Big Week Ahead

Boy, it only took a single day of weakness, Thursday, for bulls to get right back to work. Friday made quick work of the bears and the bulls look like they are not quite done yet. Of course, the Fed will have a lot to say about that when they conclude their two day meeting on Wednesday with an almost certainty for fireworks. More on that in another update.

The government released Q2 GDP and it can be interpreted two ways. First, it came in at 2.1%. That is not a strong number in a vacuum. However, analysts were expecting something just shy of 2% so the number beat expectations. I was looking for a number that began with “2” so it was right on from my seat. The President was all up in arms that had not been for Jay Powell and the Fed, GDP would have printed a “3” number. While that all sounds quaint, there is no way to prove or disprove that notion. Trump has been doing a great job of antagonizing the Fed and turning them into villains. You know my read. They are not competent enough to be a villain.

Friday’s nice rally in all major indices but the Dow had little to do with the GDP report. Tech was solid but semis took a breather. Banks were strong yet again. Discretionary and transports were average. Junk bonds have been digesting for almost two months and they seem to be percolating for another move higher. The NYSE A/D Line just keeps plowing higher to more fresh all-time highs.

The headwinds I discussed last week in Lots of Ammo for the Bears remain in place. And if you only read the headline which some people apparently did, you totally missed the theme of the post. I was absolutely not taking the bearish case. Quite the contrary.

With earnings and the Fed, this week should be a high profile one with some volatility.

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