This
is the million dollar impossible question.
After
the worst December from 1931, we have the best rally since 1991. What did
change? Essentially, you can see the arrow, That was the 4th of January
where the US Chairman Powell declared in an interview that the FED will be more
data dependant (meaning probably at least a pause in the rate hike) and that
the balance sheet run-off (the drainage of liquidity due to the end of QE) is
not set on an automatic course. Powell even admitted: “We’re human, we
make mistakes but we’re not going to make mistakes of character”, in
response to a question on whether the change in policy was a result from
pressure from the White House.
The
issue is that, as new Chairman, he wanted to show the markets that he was
different than Chairman Yellen and he was sideblinked by the market for his
arrogance. (My December newsletter title – Central Banks errors was correct
indeed).
The
situation is confusing to say the least.
Technical Analysis.
The
violence of the down move graphically asks for a re-test of the bottom around
SP500 2,300. The top of the current move should be somewhere about 2,802/2,817
and 2,873/2,920. The base of this move 2,742/2,710. A break of that level will
open Pandoras box.
The
end of cycle target is still SP3,200 or above. Adaptive analysis indicates that
this current rally could still last for 30-60 days (end of May).
Economic
Data (which are a bit confusing as the winter was really cold in the US) point
to a real slowdown in the US economy (not a collapse), which indicates that
this is a Bear Market Rally.
The
intervention of the FED in January (and the other reserve banks in February)
mixes up the cards a lot. There is an old saying in Wall Street – don’t fight
the FED.
It
simply says that the FED has too much money and power and you better not bet
against it.
On
the other side there are the USA/China trade wars (or US vs world trade wars,
as President Trump is trying to renegotiate 40% of the world trade holds the
other 50% of the rally). The market has been propelled higher by “positive
leaks” about the trade talks (although there are still quite large differences
especially on Intellectual Property and surveillance). But leaks are not
agreements. There was even a funny (or not funny) moment where one of Trump’s
senior advisers had to explain what was a Memorandum of Understanding to Trump,
on national television.
In
March there will be the first serious test of this rally:
-The
Federal Reserve notes will show what their future outlook is that will
influence the yield curve (the inversion of a part of the yield curve was one
of the causes of the December selloff as it is reputed as one of the few real
indicators of a sure recession).
-The
outcome of the US/China trade talks – while I think that both President Trump
and President XI both need a positive outcome, implementation will be key. If
the media believe them, everything will be fine (well the media believed that
US/North Korea summit was positive and the market relaxed – in reality nothing
really changed – US satellites are still
picking up activities at nuclear sites – apart the absence of bellicosity).
-The
economy: The Q4 earning season (January-February) was not as bad as feared –
over 90% US companies have reported EPS growth over 14% year on year (versus 9%
forecast). While good, it is way down 20% and the companies beating
expectations have declined. Companies need to be able to improve to sustain
gains. Q1 2019 is upon us.
-Technical
Analysis – we are at a major barrier, but most investors have missed out on the
January/February rebound as they divested heavily in December. The Relative Stength
Index is overbought so it warrants caution. But there could be a last leg as
there is still a lot of cash on the sidelines (or as they say in Wall Street
FOMO – Fear Of Missing Out) and the market feels robust ignoring the negative
news.
investorpolitico 