Ok. So much for the serious tone. But why so dramatic? The stock market is at a major inflection point. (noun: a time of significant change in a situation; a turning point.) Over the next several days, the current stock market rally attempt will be extremely vulnerable to significant negative news regarding trade wars or Fed interest rate decisions. At the same time, the market is hoping for (and seriously needing) a major positive catalyst in order for it to surge dramatically higher. That type of catalyst could be delivered by Trump or Powell soon. For the bulls, it needs to be ASAP.
Our Current Market Outlook, which is dictated by the math of the market as measured in part by our “Core Four” internal indicators, remains “Market in a Correction” with a “red” light. The signal almost improved to a yellow condition in the last few days, but fell short. FYI: It is possible our signal could move straight to green with a powerful market reaction to a positive economic development.
The major market indexes are stuck in a box; a narrow trading range where sellers are perched above ready to dump shares at a pre-determined price level (resistance), and buyers sit camped below ready to scoop up “bargains” at a different level (support). The 50-day moving average is the ceiling while the August 5th low is the floor. This tight trading range (box) reflects the uncertainty in the market currently and it will not go on indefinitely. Traders should wait for a big price move, in one direction or the other, on massive volume in response to a meaningful news event before going long or short. Investors would be wise to stay calm, wait patiently before committing new capital, and then follow their lead.
Two weeks ago we wrote about the possible outcomes of investors actions and noted one could be a recession panic. Then a week ago today the Dow Jones Industrials dove 800 points as the yield curve inverted intra-day. Let’s be clear, that was not a panic. It could, however, prove to be the start of one that may take several weeks to develop. Though, there was good technical news for the bulls from that day’s action, as the put/call ratio and the NYSE TRIN experienced panic like readings and set the stage for the 3 day rally that followed. Today’s action, although down big in price, lacked heavy volume and looks like a pause to refresh. We shall see soon.
All eyes (and ears!) will be on Fed Chairman Powell during his speech on Friday at Jackson Hole. Twice already in the past eight months Chairman Powell has served up a market saving speech that created lift-off in stocks that even NASA would envy. Will the United States succumb to the growing global pressure to drive our interest rates to zero, or even to negative rates, in order to stimulate the world’s economy? Don’t laugh. With the tsunami sized volume of the world’s capital crashing onto our investment shores now and driving its way deep into our bond market, it could happen here too.
Think about this: If you were the Fed and you had a massive balance sheet of low yielding fixed-income assets, what would your end game be?
I remember talking with colleagues a couple of years ago about the dilemma the Fed was facing regarding its bloated balance sheet and speculating that they may have been “checkmated”. It seemed that interest rates would have to move higher in the future and we wondered how the Fed would ever find enough demand to off-load its balance sheet. Could it turn out that the Fed may be one on the best fixed income investors ever?
It’s been said that “if you build a better mousetrap, the world will beat a path to your door.” Maybe Trump & Powell have done exactly that. And maybe, just maybe, in the long run they may prove to not be such adversaries after all.
Have a Triumphant day! ®