The Fed vs Fundamentals - Who Will Win? A Mid-Year Market Update
Welcome to our mid-year review. It is the Fed against the underlying fundamentals. Who's going to win on the second half.
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So now we're going to talk about the Fed and the fundamentals. What's underneath, who wins?
Let's go to the big charts, but first I do want you to know when I go through signals they can and do change. Today is Friday, July 6, 2019 but they will change over time. I'll make sure to post those changes now going forward on our Facebook, Twitter and LinkedIn.
when you look at this, of course you would say it is positive, right? We had our lows, we went up, we pulled back a little bit, of course we've had all these #PowellsPuts which have really helped the market and then last week we came out again when #Trump talked about a potential fix with #China and #tariffs. Now, I am still in the camp that that's not not going to happen, but that's another story. So when I'm looking at the Daily chart, I say we are positive. But there are a couple of things I want to point out on the bottom of the chart because because helps in my decision making process as well. The VIX is at about 14 right now, it broke 15, so you're still hanging in there. There's your line, the line in the sand. That helps me determine where you are. Momentum, MACD crosses, that's positive. Relative strength of the market, you can see for pulling back a little bit today, on Friday, after an unemployment report. New on this chart, at the very bottom is the Chaikin Money Flow report and as you can see it shows flows of money into the market. You can correlate it with the top of the chart, when money's go in and it's going up and now we're negative and we've kind of paused a little bit.
I look at this, you can look at this and we can see that it's positive. Why? A couple of different things. We did have a momentum crossover. The only that concerns me is that if you follow the line from the 2015-2016 we failed.
Looking at the monthly chart, I'm going to say we're neutral. Why? Well you can see it's ready to cross over from a positive standpoint. We don't know because it’s not the end of the month, it's the beginning of the month. But I've said this before the biggest thing is relative strength and the line drawn is negative divergence. What do I mean by that? Each time we've hit a high we've gotten lower. That's not good, the strength is lower and the market's gone higher.
LET'S GO BACK TO THE FIRST CHART
It really has been two separate markets. What do I mean by that? Well first off let's look at December. The worst December in history. You're down 20 some percent and then of course you go this way. That's September 21st. 2940 today. 2955. So we're really up just 1 percent from that and it kind of gives you an idea.
LET'S LOOK AT THE BOND MARKET
Again, we always say that the bond markets are smarter than the stock market. So when you look at this chart, rates continue to go down. Our yield spread, there's two yield spreads we look at, ten minus two is .19, not the low for the year. The big one is ten year minus three month and it is negative, -.25. Most importantly we have been negative on that for 30 days. Every time since 1940, except 1987, that has led to a recession. So that is a real important indicator that we are going to continue to watch.
LET'S LOOK AT SOME DIFFERENT MARKETS
So here's your 10 year at 2.07, the UK is at .77, Japan is at -.12 and Germany -.3. I have also listed all in two year bonds and look at all those negative rates. Imagine giving the government your money and your paying that. Does not make any sense at all.
WHAT KEEPS ME UP AT NIGHT
First off I have been quite a contrarian. Last week when President Trump came out this was all the data that came out that day:
Every piece of this is negative. Manufacturing Chinese went below 50 which means it is contracting. Vehicle sales in Japan, consumer confidence down, everything here went down that day. That's the fundamentals I talk about and I continue to watch.
What about GDP? . GDP has now gone down to 1.5%. Hold on Wednesday they moved it again to 1.3%. As Joe likes to say "just the facts". I'm not making this up but this is the things that I see below the surface.
EMPIRE STATE MANUFACTURING
Worst month over month fall in history. Empire, New York manufacturing, which leads us to PMI.
the overall ISM number, PMI composite, 51.7. Look at that trend right there. Down down, down, down and down. That is not a good thing. That is manufacturing.
Highest level since 2006, of companies looking at negative earnings. Companies are warning that earnings results are going to be brutal. I don't make this stuff up, I read it and react to it.
NEXT UP - GOOD NEWS!
This is now the longest expansion in history. How does it feel, does it feel great? Not really. This is the longest, but the lowest performing, one in history.
I've talked about this our friend Mr. Powell. He doesn't have the ammunition. You've got the Fed Fund rate. So today, good news was bad news. Last month, bad news was good news. What Michael? So last month we had a terrible unemployment report and everyone thought we were going to cut rates. Today we had a positive one. That's why the markets are down today. I think they wait till September. That data doesn't support at all, a cut right now.
EARNINGS, EARNINGS, EARNINGS
Remember when you buy companies, when you buy the index, it's based on future earnings. It's critical. Now here is just 18 of 497 companies have reported so far. How about that number -18.34%. So we've gone from 24% month over growth month over month to 12% to 1.56%. Now I don't expect that number to be -18% but it's going to be negative this quarter folks. So this market continues to go higher, driven by the Fed without the support, without the fundamentals underneath.
WHAT'S ON MY RADAR
I've been saying that I've been in low Beta, low volatility versus high beta.
Some of those sectors could include utilities, REITS, treasuries, healthcare, gold, home construction, like how could that be, low rates right. All of these are pretty much interest rate sensitive, communications and then I added consumer staples and high dividend going into the month of June.
LET'S TALK ABOUT GOLD
OK. First up let's talk about gold. I'm in or out. Why? No earnings, no dividends, up or down. That's your choice there when it comes to gold. What do I do? I look at death cross and golden cross. Death cross is when you're 50 day goes over to the downside of the 200 day moving average. A golden cross is when you're 50 day goes above the 200 day. You're going to go out (red) and in (green). We got in, in November, little early because interest rates were going down because gold does like low rates.