Insurance Rate Cut, Oasis in a Recessionary Desert, Dow 30,000

Here we go. We went a whole two FOMC meetings without the media labeling them something like, “the most important Fed meeting ever”. That was a whole 12 week respite. But fear not, there is widespread labeling today that there has never been a more important FOMC meeting than the one ending today at 2:00 pm. Before I begin to unpack today and what lies ahead, I want to extend a thank you for the support I have received since my accident. I feel great and I am healing way ahead of schedule. It’s been nothing short of miraculous. I am one lucky guy.

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 trend for stocks to close the day higher. Finally, the other strong trend is to see stocks surge between 2 pm and 4 pm. Given the strong rally in stocks over the last 5 and 10 days, the trends should be somewhat muted.

No Rate Hike Today. July on the Table

The FOMC is not cutting interest rates today. I know the media has played up the possibility, but the market has only priced in a 20% chance of a cut and few are really expecting any action. Shockingly, at least to me, the market has priced in an 80% chance of a rate cut at the end of July. Right now, I don’t see it.

While the Fed supposedly doesn’t use the stock market as an interest rate guide, the stock market is now just about 1% from all-time highs, certainly not in need of rescue like it did in December. Economic data has been mixed. The most recent employment report was weak, but retail sales have had a bit of a resurgence. Housing continues its struggle from what was (no longer) higher mortgage rates and the capping of state and local tax (SALT). However, consumer sentiment and confidence has rallied yet again. The demise of the consumer seems to have been greatly exaggerated, at least so far.

Adding all of the preceding up, I find it very hard to argue for lower interest rates. Now, we all know there is more than just what I mentioned. The FOMC had been raising rates as GDP strengthened. GDP is now tailing off a bit. The FOMC had been concerned about inflation that hasn’t materialized at all in over 10 years. There is no present worry about inflation, either at the core or including “volatile” food and energy.

Europe’s economy is weakening to the point of needing stimulus from the European Central Bank. China’s economy has been severely hurt by U.S. tariffs. Some will argue that the U.S. economy can’t continue as an oasis in an otherwise recessionary desert. If the Fed moves to rate cut alert, it would be doing so purely as insurance and not based on their Congressional mandate of maximum employment and price stability.

What to Expect in the Statement

Overall, it is widely expected that the message from Powell & Co. will be dovish. In other words, the Fed should move the message towards an interest rate cut without actually doing one. As with every FOMC meeting, pundits and the computer algorithms will quickly parse Jay Powell’s statement for material changes from the last meeting. It is widely expected that the FOMC will remove the word “patience” from its statement. Yes, I know. It’s hard to believe that the markets will hang in the balance for the removal of a single word in the statement. Analysts will also quickly turn to the “dot plot”, an anonymous forecast, FOMC member by FOMC member, of where they forecast the Federal Funds Rate to be in the future.

And Then There’s Trump

Everyone knows that this presidency has been different and unique from all others. Regarding the Fed, President Trump has certainly tossed aside all historical norms. Until Trump, the President did not comment about the Fed, its chair or its policies out of respect for its independence and for fear of rattling the global markets. We now know the latter has been debunked. Donald Trump has been a very vocal critic of Jay Powell and the Fed’s policies, even though the President chose Powell to lead the Fed. Frankly, I find it very uncomfortable that the President criticizes Powell and the Fed or even speaks about them at all. I don’t think that’s healthy. But I don’t get a vote in that regard.

Some have wrongly speculated that the last rate hike in 2018 was some sort of payback by Powell and the Fed to Trump. I find that to be absolute nonsense. Why would the body responsible for the economy do intentional harm? They wouldn’t. Lately, there has been talk of Powell being demoted or terminated as chair. I rate that as very unlikely.

The Fed also has to deal with what I have affectionately referred as the Trump Tariff Tantrum. As I have written since day one, no one wins a trade war. Some just lose less. The on again, off again tariff war with mainly China has put the Fed in a difficult position. If all threatened tariffs proceed ahead, then you can certainly make the argument that an insurance rate cut or even two makes perfect sense. If a deal is reached with China, then the economy should see a small bump higher.

Mild Recession Coming by the Election

Whatever happens, one thing is almost a certainly. The Fed will not forecast the next recession.

WHY?

Because in the history of the Federal Reserve, the Fed has never, ever accurately predicted the next recession. They are perfectly in their incompetence! You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is almost always late. 1995 was the exception and they threaded the needle. For years, I have criticized them for raising rates and selling assets. I thought it would fertilize the landscape for recession. The tax cuts forestalled that, but the next recession is coming, but to be fair, it’s always coming. I continue to believe that a mild recession will begin before the election. For sure, it will be interesting to see if the Fed begins a rate cut cycle and that somehow pushes recession out for years. I don’t have strong confidence, but I will certainly root for that to be the case.

Housing remains very challenging with what was higher mortgage rates, millennial behavior changes and the capping of state and local taxes at $10,000 from the 2017 tax cuts. Credit card and auto delinquencies remain elevated in the face of the good economy. The tariffs are the big question mark. A full-fledged tariff war with a teetering economy could tip us over. The next 17 months into the election are going to be interesting and full of “fun”.

Stocks Set to Burst to New Highs Before Declining

Since the last Fed meeting, the stock market has gone essentially nowhere. In between, we saw a 7% decline and roughly the same rally. Both seem to have been strongly influenced by the Fed and the tariffs to a lesser degree. My long-term message remains unchanged. The bull market is alive and reasonably well. Dow 27,000 should be seen sooner than later with a chance at 30,000 by Q1 2020. Higher stock prices will make it more challenging for the Fed to cut rates.

Over the intermediate-term, I have a small but growing list of concerns that is causing me to shift from buying the dip to selling the rally. Stocks are positioned to see one more burst higher to new highs on the Dow and S&P 500. The NASDAQ 100 may also follow suit, but I doubt the S&P 400 and Russell 2000 will. If we do see that surge to new highs, I think it happens right here. The worst thing for stocks would be a quick push higher post 2 pm today and then a decline with a close near the lows for the day. That could set stocks up for another single digit pullback.

Semiconductors are not leading. Neither are transports. Banks continue to look very appealing to me, but they are not leading yet. Only consumer discretionary is in a leadership position from my key group. High yield bonds are acting well, but they could be stronger, especially of late. Very importantly for the sustainability of the bull market, the New York Stock Exchange Advance/Decline Line which you can see in the second chart below, continues to make new high after new high. Bull markets do not end with behavior like this. There is widespread participation in the rally, even though it’s not perfect, or at least not yet.

With stocks rallying sharply into the FOMC meeting, there is certainly a chance of selling the news or disappointing. There is also a chance that stocks surge and then fall. The only scenario which seems unlikely right here is for stocks to blast off, unabated. That path would definitely catch me off guard. After today concludes, it’s also one road I will need to do work on to figure out how to best navigate.

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Big Move Coming. Binary Outcome.

The stock market begins the week in digestion mode as the Fed meeting looms on Tuesday and Wednesday. Stocks rallied in vertical fashion from June 3 to June 11 and have now paused. The next move should be a good one, whichever direction prices break. The longer the consolidation lasts, the more I would be on the lookout for a fake out, meaning that the first move out of the range sucks people in and then immediately reverses for the real move.

Taking a slightly longer-term view, the rally in stocks off of the bottom can be viewed as “impulsive”, meaning it is the very powerful beginning of something much bigger as you can see below. If this read is correct, the next move will be higher and match the magnitude of the impulse. In other words, stocks would scream higher to new highs.

If the rally off the June bottom is not impulsive and it fails where it says “Can’t Fail Here”, the entire move in June would be retraced and new lows would be seen over the coming month or so. It’s a very binary outcome with a significant move in either direction.

Last week, I wrote about looking for bearish opportunities because a number of our models turned negative. Ignoring what I wrote above, the upside would be roughly 2% or right back to the old highs versus a downside of new lows or at least 6%. That’s 3:1 to the downside.

The outlook should clear up sooner than later and the outcome of the Fed meeting will be one event to help with that. Trump’s supposed meeting with Xi is another.

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Change in Character. Opportunity for the Bears

Earlier in the week, I offered that very short-term, nimble traders could sell the rally as stocks were beginning to look a little tired. I stick by that and still believe that’s a good strategy. Since then, several of our models have started to turn negative which changed my tone to be more defensive and less “risk on”. I think that will likely be the case into Q3 although that’s purely a guess. Of course, I could be wrong and might have to chase stocks higher down the road.

When I do a quick sector review, most of them look very similar with the exception of the defensive ones. They look tired which can be corrected by sideways movement or an orderly pullback. Utilities, REITs and staples look much healthier unless they close below their lows of last week. High yield bonds are holding up really well and that is one sector worth keeping front and center. Without junk bonds rolling over, it will be difficult for the bears to make much noise in stocks.

On the horizon we have the Fed set to meet this month along with the G20 and the anticipated meeting between Trump and Xi. Either could be a positive or negative catalyst although I have a tough time believing that Powell & Co. will cut interest rates this month.

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Sell the Rally? Mexico, Mega Mergers and Meat

The markets start the new week with an absolute cornucopia of news. We have mega mergers, Mexico, meat and employment. Obviously, the most important news comes as no surprise to anyone; the deal with Mexico to avoid the first in a series of tariffs on Mexican goods in response to the border and immigration. Stocks rallied sharply last week with an expected deal with Mexico as a significant contributor. The weaker than expected employment report on Friday was greeted with cheers as the markets were now expecting the Fed to cut interest rates at least three times by the end of Q1 2020.

After the strong run last week and the big up opening expected today, the stock market certainly has the feel of an opportunity to sell the news for the very short-term, nimble trader. Just like stocks went down very far an very fast, they rebounded in similar fashion. There is nothing wrong with taking a few chips off the table for a few days or so. Let’s see which indices and sectors lead today and how they close. Utilities saw a big downside reversal on Friday. If other “risk off” sectors follow, that could see funds eventually flow into my four key sectors which are “risk on”.

I want to finish by offering a few comments about the hottest IPO of 2019, Beyond Meat. The stock has now surged from roughly $40 to more than $160 in about a month. While everyone was focused on Lyft and Uber, this teeny, tiny company with a sliver of revenue has gone absolutely parabolic, reminiscent of the Dotcom days. There is no way to justify this behavior. It’s pure speculation, greed and froth. I don’t care about its future prospects. Should we start to see other IPOs behave like this, we will have a much bigger problem on our hands. For now, I consider this  a one off.

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Stocks Bottom on Schedule Catching Most By Surprise

For the last two weeks, I have written about the bottom I saw coming and how I would favor stocks over bonds. I didn’t write about a 10%+ correction nor a bear market beginning. I was very clear that I thought the stock market was experiencing a routine, normal and healthy bull market pullback that began on May 1 after the last Fed meeting. On May 13 as many of our short-term indicators signaled that the vast majority of the weakness should be over, I was concerned that the decline did not seem complete. I thought we needed to see at least one more move to new lows where the major stock market indices did not close near their lows for the day. We saw that on May 29 and again on June 3 where the pullback appeared to be over.

As I write about all the time, bull markets typically end a certain way. At the peak on May 1, there was not a single indication that the bull market was ending. As the pullback gained steam, there was an ever-growing chorus of gurus calling for the end of the bull market for all of these far fetched reasons like tariffs and recession. The market said otherwise. I was surprised at how investors were reacting to a little ole 6% pullback.

Option traders in the bottom half of the chart below were positioning for much lower prices. As you know, en masse, they are usually wrong. Sentiment surveys were showing a spike in bearishness that is usually seen after at a 10% decline. I don’t what had people so amped up for lower prices, but they were quickly punished.

As stocks bottomed this week, the media scrambled to assign credit for the low. First it was Fed Chair, Jay Powell, who essentially said nothing new. Then it was some mildly weaker economic data followed by hopes that a deal with Mexico would be reached. Today, we hear that stocks are rallying because monthly jobs data was weak and would lead to a rate cut. I also saw the media say that stock are up because Chinese President Xi said he likes President Trump. You just can’t make this stuff up.

As stocks have been rallying, look at the lower chart below which represents the number of stocks making new 52 week highs on the New York Stock Exchange. There is real underlying strength here and clearly no sign of a bear market or major collapse.

Finally, among many things in the media which have been wrong, I found it so beyond “curious” that word leaked out that famed investor Stan Druckenmiller had sold all of his stocks and bought treasury bonds after Trump’s tweet regarding Mexico. What took so long? Why did it come out precisely as stocks had bottomed? The skeptic in me wonders whether the timing coincided with Druckenmiller trying to buy stocks again after they already left the starting line.

It’s amazing how quickly stocks turned on a dime and the news narrative has changed from all of the negative consequences concerning tariffs and the coming recession to the Fed about to begin a rate cutting cycle which would rescue the economy and markets. My tune has never wavered. The bull market remains alive and al-time highs should be seen in Q3.

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Volatility to Continue But Bull Market Remains Alive

Last Thursday night, I wrote a quick piece about the latest tariff tantrum from the President. Early indications were that the stock market was looking at a very ugly opening on Friday. Bears were hoping for an all-out rout, but I wasn’t sensing that. In the end, most of the major indices closed slightly lower than they opened, meaning that not much transpired during market hours.

As we start the new week, I would expect the bears to make some more noise sooner than later. Pre-market indications have stocks down again. Whether it’s today or tomorrow, the bulls should try and step up to stem the tide. If Monday is a big down day, I would froth at the mouth to buy a down opening on Tuesday. If Monday morning sees another wave or two of selling, I would use that as an opportunity to commit capital to stocks.

Stocks are down 6%+ from the May 1 high. Investors are acting like it’s down 10%+. Sentiment is very negative. Options traders are lining up with negative outcomes. The New York Stock Exchange Advance/Decline Line hit its all-time high last Monday as you can see below. 90% of the time, bull markets don’t end like this.

June should be a volatile month and the bears could push a little lower before all is said and done. However, at this point, investors need to be on guard for some out of the blue good news to reverse the trend. Yes, as much as it pains me to say, it could be a tweet.Gold is acting well as are emerging markets. Be careful with long-dated bonds. They have melted up and ripe for a downside reversal

The bull market is definitely not over and I am looking for all-time highs in Q3.

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Here We Go Again. A Fresh Tantrum

As you know I have been waiting for a better set up for the stock market to find a low. Specifically, as I mentioned the other day, I wanted to see more downside early in the day which led to a close that wasn’t in the bottom of the range. That would serve as a revisiting of the May 13 low. We saw that did happen on Wednesday and it should have at least stemmed the tide. However, as has been the case for the past month, markets remain on “Tweet Watch” from Donald Trump regarding his tariff tantrum. What a way for investors to manage money! At some point, however, stocks will begin to ignore this behavior although I do not think it will be on Friday with the latest attack on Mexico.

As Whitesnake wrote and sang beginning in 1987, Here We Go Again!

The important question is will stocks close at new lows for the week and at their lows for the month. Clearly, the bears are looking for an all out assault to force more selling after what looks to be another ugly down opening. At this point I can only say that it doesn’t have the feel of a rout, but I am just speculating. We shall see what comes after the open.

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Back in the Saddle. Bottom Getting Closer

Let me start by apologizing for going dark last week. I had a little accident with a tree and the tree won. I ended up in the hospital and just focused my work efforts on running our strategies and not doing any writing.

And after not publishing last week, not much has changed from where I left off in the markets. I was in the short-term pullback camp after the May 1 peak, but it looked like much of the damage was done into the May 13 low. I say “much” because the decline did not look complete on the 13th, even though a rally ensued. After Tuesday’s drubbing, the market is much closer and I am watching to see the major indices break to new lows, not close in the bottom 25% of their daily range and then stabilize.Risk on indices are leading on the downside so that will need to change as well.

Tomorrow, I will dive into sectors, high yields and some indicators worth watching down here.

 

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Tweet Watch Again

Although our models were flashing numerous green lights at the close on Monday, I wasn’t convinced that the final low was in. And nothing this week has made me feel any more comfortable. I am definitely not concerned about meaningful decline in the stock market, just that the 5% pullback doesn’t seem complete. Of course, you could push back and say that I am being too cute with such a relatively small decline and you would be right.

What bothers me is how the market bottomed, but that has been more the case of late during declines, mostly due to the machines doing so much of the trading today. The economic backdrop has been fairly strong with jobs, inflation and today’s 15 year high in consumer sentiment. Housing and auto remain weak, but they don’t seem to be spilling over into anything else yet. Don’t minimize the deal cut with Canada and Mexico today regarding the removal of tariffs.

Sector leadership has been good, but I certainly don’t like how weak semis have been over the past few weeks. The Dow Industrials and NASDAQ 100 are the unusual leadership couple in the major indices, but something will have to give there before month end.

I can’t believe I am going to finish with this, but I am sure many people will be on tweet alert this weekend. Just hard to believe…

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THE Bottom or A Bottom? Banks Looking Good

After Monday’s mauling by the bears the losses mounted to roughly 5% and was pretty much in straight line fashion since the May 1 FOMC meeting. In other words, for all the fire and brimstone by the bears, all we have see, so far, has been a normal, routine and what I will call “healthy” single digit, bull market pullback. Very little internal damage has been done.

The Dow Industrials said hello to its long-term trend, the average price of the last 200 days, but no other index has made that trip. You can see that line below in the pink. I am not viewing it as all that important.

At Monday’s close a whole of our models and indicators flashed green, meaning very favorable conditions ahead to own stocks. Since we take any defensive action ahead of the decline, we really didn’t have much dry powder to use on that new green signal.

One thing that bothers me is that stocks closed near their lows on Monday and jumped higher out of the gate on Tuesday. That’s a very atypical fashion to put in a bottom. I would rather have seen some more short-term weakness. As such, I am keeping that scenario open, where we may see another decline below Monday’s lows. Regardless of which scenario stocks follow, I remain firm that this is not going to be a full-fledged 10%+ correction and that the bull market is not over. Furthermore, all-time highs should be seen in Q3.

Sector-wise, although I still really like technology, I would rather buy it at lower levels with new money. The banks interest me right here and right now. Sentiment is poor on the sector and I don’t hear anyone talking them up. That’s the kind of trade I like. Additionally, it’s hard to argue with the behavior in the defensive area, specifically staples, REITs and utilities. They are certainly signaling slower economic growth and a thirst for yields.

I think I need to do a bigger update outside of the blog. Maybe tomorrow.

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