Markets: and now what?

Posted: March 7, 2019 in Uncategorized

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.

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