Powell’s Much Ado About Nothing While High Beta Percolates

Markets were on pause mode on Thursday as everyone awaited Fed Chair Jay Powell’s speech from Jackson Hole on Friday morning. Most of the stories I have read and media interviews I have seen had a very binary outcome from Powell’s speech. It was “all or none”. I don’t agree. I think he is going to straddle the line as much as possible and say very little in the way of new or market moving information.The key will be not what the news is, but rather how the market responds to it.

Stocks continue to behave fairly well in the face of seeing alternating triple digits moves in the Dow. Nothing has changed in my thinking that the ultimate resolution for the Q3 trading range will be higher with Dow 28,000 up next. Of note lately, I am starting to see the early signs of the riskier stocks (high beta) percolate for a leadership role over the less volatile ones. You can watch this in ETFs like SPHB and SPLV, high and low beta. I also really like DWAS is a small cap momentum ETF. I know. I know. Small caps have stunk. However, this fund has bucked the trend.

On the sector side, I want to see the semis close above this week’s highs to give stocks some nice juice. Software is already there and leading. Banks and transports continue to lag and that needs to change sooner than later. Homebuilders trade very well on the heels of much lower mortgage rates, but they cannot lead stocks. Still, the defensive groups are rock solid and threatening to score all-time highs again. My barbell approach.

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Bulls Look to Trap Bears – Semis the Key

The bulls had the chance. They could have really squeezed the bears. But they weren’t totally ready just yet. Tuesday’s afternoon selloff looked on the ugly side, but in reality it just kept the stock market in the same range it has been in all month. I want to see a daily close in the Dow above 26,500, S&P 500 above 2945 and NASDAQ 100 above 7800 to confirm the bull are readying a run to the old highs. These levels are not that far away. Although I sound like a broken record and my thesis may end up being broken, I remain firm that this range and the pullback will ultimately resolve itself to the upside this year with Dow 28,000 up next.

For a while I have written about my “barbell” approach to stocks, weighting some aggressive sectors with defensive ones. In this case, as you know, I have loved the semis along with utilities, REITs and staples. Right now, I am not really interested in the middle. While semis can sometimes be at the mercy of the overnight tweet regarding tariffs, they are more and more immune, especially on a relative basis with each successive scare. Fresh all-time highs are my target.

You can see the chart below and it looks a whole lot better than the pundits and media would have you believe.

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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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