Tariffs + Earnings = Market Declines - Market Update May 31, 2019
Tariffs + earnings = market declines, signal changes and breakdowns in the charts. All this and more in this week's market update.
We've been hearing lots about tariffs with China and now let's add in Mexico. Markets hate tariffs. Not surprised about the China situation, Mexico, little bit of a curve ball and then earnings. But first let's go over today's agenda. We're going to go through big charts and signals, lots of changes there. Treasuries. What's going on with the bond market. What keeps me up at night. Tweets of the week, on my radar and game plan going forward. Let's get started with our charts.
DAILY CHART-SHORT-TERM SIGNAL (SIGNIFICANT BREAKDOWNS)
Gap down and we are now below the 200 day moving average. Not a good thing. Momentum really broke down last week. You can see that negative crossover and then relative strength broke 30. That is bearish and we have not seen that in a while. The next thing of course is your VIX, Volatility Index, I have been talking about this. We've been snuggling along this 15 were at 19, as of today. So right now short-term signal, you're not going to be surprised, is definitely negative.
WEEKLY CHART-MID-TERM SIGNAL
We have started to see a head and shoulders, we talked about this in our video mid- month and guess what, it really continues to form. Not only that, we've had a negative crossover on momentum and we broke, in this case I look for the 40 week average, and we have broken that today. That is not a good sign. That is also given me a negative signal which is going to make me make changes today which I will discuss later on.
MONTHLY CHART - LONG-TERM SIGNAL
Well no surprise here. I've been negative on the long term view for quite some time. Why. Because the momentum has gone negative. We came up but failed. Not only do we fail, we went below the 12 month moving average. We are negative. So all signals are negative right now.
Let's go behind the charts and look at some data that's going to continue to support all of this. First up 50 Day Moving Average S&P below 40, bearish. You've got NASDAQ about 30, obviously bearish (below 40 bearish above 60, bullish) Mid Caps 20's and then we've got Small Caps in the 20's.
What I'm looking for on the 200 day, which is long-term, is a move below 40. (This chart updates at the end of the day so it's through May 30, 2019 and we're recording this live early May 31, 2019.) We're about 50 right now in the S&P but we've had a breakdown in both Mid Cap and Small Cap that is not bullish at all.
Let's take a quick look at bonds and treasuries. So it wasn't long ago I called this the most important chart of 2019, why? Here's your 10 year Treasury. You can see the trend line going back to 1980 and we broke it for the first time since 2000. We opened up today 2.17 on a 10 year Treasury. I had it 2.30-2.25 outlook and now I think that we're going to see probably a little bit of a bottom here. We really have some oversold conditions but then I think we still go lower after that.
Now, let's look at yield spreads, a real good recession indicator. Kind of flat here, .16, but the big thing that I see here is your five year has now broken below your two year. That is very unusual. Again this is this flight to quality that we're seeing. Bond rates are getting pushed down because of people being concerned about the global slowdown. Let's look at some of the other countries. You've got the U.K at .90, you've got Germany at -.18 and Japan at -.0. If you can believe this, we have 14 trillion in negative interest rate bonds out there. That is not a good thing.
What Keeps Me Up at Night?
Clients often ask me, what keeps you up at night? A lot!. It's the macro data underneath, that I've been talking about for a while, that has been deteriorating for some time. One of the reasons I've been more on the conservative side. In this chart you will see the Triple B rated corporate debt. You could see in 2008-2009 where it was. How about a four hundred percent increase. We're starting to see some defaults here. That is a big concern. Auto loan delinquencies surge. You can go back here to 2014 and see it come up. We are basically where we were in Q3, 2009.
Earnings, earnings, earnings. Underneath this is what has concerned me. 483 companies reporting and we went from 24% to 12% to 1.55%, talk about a earnings recession...you have a -6.25 in tech. That is an issue going forward and it will be an issue going forward, if we run into that earnings recession.
China deal. Obviously we've been talking about this, consistently I have said we're not going to get a deal. They have their plan. They don't like America. They will not make a deal with us and now they're going to sit back until the election because they can and they will just flood the market with liquidity like they did last week and hopefully keep things moving. But I got to tell you. Tariffs are bad but that's not everything. Here's my data from this morning around the world. Look at all that red. This is GDP and consumer confidence going down across the board. This is the global slowdown. This is the data that I see every day that keeps me up at night.
Tweets of the week
Hello. Pay attention to that one.
Mark Yusko, great follow, Morgan Creek Capital on CNBC all the time.
What's on my radar
It's no secret, I've been underweight, high-beta high risk, equities, tech etc, large cap, things like that, mid's small's and emerging markets. This is where I've been pretty much, consistently, all year. Interest rate sensitive, late cycle sectors, utilities, REITS, they've been the number one performer this year, home construction, communications, healthcare, gold, large value and large growth. A couple of reasons; I did not believe this recovery. Here is the V shape. So I've been more conservative in low beta sectors and you can see from our high back in April 22nd what's happened.
Here is low volume, 1.53 high beta down 9.4% since our high, and that explains a lot. So going back, when I look going forward and what I've done. First off, last week we got our first signal when we sent out a letter to our clients and we raised cash. We did our first short last week and we started selling. We sold large growths from 15 to 5 percent, that was the main move that I made last week. I'm ready to make moves again today. I'm going to add another short. I'm going to continue to raise just a little bit more cash and I'm going to cut large value as well. I'm going to stick with these sectors and do the shorts. What is a short? It's a hedge. When you think of a hedge, it's an asset class, that's going to help you in volatile times. Cash is a hedge. Like it or not, right now we're getting about 1.6 in cash. It's a hedge. Why? Because it's not going to be volatile with the market. It's not a big move but at least you're consistent. The other hedge is you can short. You can short individual equities or you can short the market. You could do a google search for short ETFs, it will give you a list. You can short financials, communications, coffee, or whatever the case might be. I personally use two shorts. The first one I added last week was a short S&P and today I'm going to short the Nasdaq 100. So what does that actually mean? That essentially it has the potential, if the market goes down, your shorts will go opposite (inverse of the market). There is some additional risk here and you have to be careful. I follow this, I've got all kinds of signals and research to get me to that point. In the fourth quarter, when the market was down significantly, we were really able to reduce a lot of those losses based on our cash and short positions.
Wrapping things up, Fear and Greed. Thirty-five two weeks ago twenty-four this week not surprising indicators negative, negative, and negative which is why I'm making changes.
Michael Loftus is a practicing financial advisor working and making decisions for individuals and companies. He love the markets, thinks outside the box and doesn't follow the Wall Street mantra of buy and hold.