The Fed Speaks and Market Confusion Ensues - Market Update
After backing itself into a corner, the Fed has spoken. Now what? Let's dive into this week's #marketudpate.
Yesterday, July 31, 2019 was the big day, Fed day, highly anticipated first rate cut in 10 years. I'm in the camp that they didn't need to do that. Scott Miner said the same thing on Bloomberg.
The Fed might not cut rates more than once. This is Bill Dudley. Very interesting.
So what happened? Take a look at this morning's headline...
That's crazy, right? And the whole point is, that the markets like to know what's going on. It's good to have transparency, if you give us a direction, which he did not. Let's go through a couple of things.
We are thinking of it as mid-cycle adjustment to policy
On the "future path" (of what's now expected as many rate cuts) he says they're in a wait and see mode. Wait for what? Tell us what your next move is. What you're looking for.
As the year began the economy and monetary policy were in a good place. If they were, how come on January 4th you came out and changed everything that you were talking about?
THE BIG STATEMENT - This cut is different from the start of a lengthy cutting cycle. BOOM💥💥!
The market went down...but wait a second, that's the one and done concept. Fast forward 20 minutes, markets down four hundred plus. A reporter asks about future cuts, Powell says, "I didn't say it was just one rate cut" and the Dow clawed back. So really total confusion. Who knows what's going on? They said it was going to be an insurance cut, but it's not. We don't know what it all means. This morning, the market's up because now the market thinks he's going to do more cutting, which I don't believe is the case. So let's get started.
What are we seeing? Very muddled. A couple of things from yesterday. We've got the VIX up to 14, it's been hovering around 12, so that's interesting to see. We've had about 30 percent rise in the VIX in the last week. The other thing when you look at the top (PP#5) we hit all time highs but momentum (MACD) is going the opposite direction. That's a negative divergence. I don't like that at all.
When you see what's happening, the other thing is sell days. Higher volume. We saw it yesterday and a couple other days. All in all, right now on my signals, I am neutral short- term with a negative bias, I want to see where we go.
What do we see here? I added this beforehand. That is a distinct wedge. Can we break above that? To be determined by the end of this week, but overall, and you can see it up close, momentum is still positive, which puts us in a positive signal for the mid-term.
Now, thought I would get a change here, as it pertains to monthly. We did not get it with yesterday's slide. So what do we see that's different? One point out the same thing. Markets go to all time highs and look at that negative divergence. That's really a problem. That just tells me there's no strength behind the underlying markets. The other thing I was looking for was a momentum crossover, didn't quite get it. So I added in another chart down at the bottom called PMO, price momentum, And you can see it's still not positive. So, again, I am neutral right now in the long-term view based on what I see here.
So after yesterday's Fed meeting, we had some big moves in treasuries. Why? Because the Fed wasn't dovish enough, which is what we were anticipating. So we saw the short-end go up and the long-end went down. So what does that do? It's going to compress things. The big thing is the ten year treasury minus two year and we are now at .17, a big move to the downside. But on the ten minus three month, we're now down to -.17.
So why is this important for anyone who's new? Because when you look at an inverted yield curve, ten minus two, here's in previous recessions, (recessions are in red) each time we've gone below, we are entering a recession. And clearly the bond market has been telling us something very different from the overall markets. When we invert, it's usually six to twelve months. So I don't foresee a recession short-term, but we are going to continue to watch this.
WHAT KEEPS ME UP AT NIGHT
Lots of things keep me up at night right now, obviously, the markets. But one thing is transports. We got another negative manufacturing number, another contraction. We peaked in September, another lower number, fifty-one, below fifty is contraction, we have not seen that in a while. So if we're not manufacturing more goods, it's going to affect transportation. That's what I want to do here. We're still down 10 percent from our highs in transports, that's an issue that we'll continue to watch.
Next up, let's talk about some of the big overseas markets, like China.
It's all about tariffs. Well, that's been pushed back, if it ever happens. They peaked last year, they're down twenty percent. They're in a bear market right now. That's an issue.
Let's look at South Korea, they're down twenty percent and in a bear market, that's an issue.
Look at Germany, one of the big outputs in the European market, and they're down about ten percent from their high. There is the global slowing. We are not synchronized and last week, Draghi came out and talked about doing whatever they to do. So if they cut, we're really on the other side of that in the US dollar that hit a two year high yesterday.
Let's look at some of the fundamentals...
So here's personal income, which has gone up. That's a good thing, right? But when you look at where we are in the cycle, when earnings are going down, we've gone from twenty-four, twelve, two percent growth, quarter over quarter last quarter and were three and a half percent, which is actually surprisingly better than we had anticipated. But you've got rising income and lower profits. That's an issue.
GDP looking at a 1.3 forecast for the quarter we're in right now. Definitely concern for the second quarter.
We came out with a better than expected number in the first quarter. How could that be?
Look at this number here. Five percent growth quarter over quarter on government spending. But wait. This administration is about small government. That is the largest increase since 2009 and that really helped drive GDP last quarter.
Good article. I mean, at some point, how long can investors go on pretending that sub- zero interest rates are normal? I say this all the time. Think of it this way. You're mowing someone's lawn. You go say to them, hey, I'm going to mow your lawn and pay you ten dollars. What do you think? Pretty stupid, right? That's what's happening. You're given these governments your money. I mean, Germany right now, it's -.4 and you're not making any money on that. That is crazy.
WHAT'S ON MY RADAR
My portfolio looks very different from in the past.
Part of the reason is we've been overweight in sectors that are based on or linked to low treasury rates. That's a call we made back in November that worked out really well. We felt that treasuries were going to go down. So you could talk about REITS, utilities and some other sectors.
Another sector that does really well in this part of this cycle is health care.
Now, it's been staggering along, not uncommon. You see here it went sideways for a while and then we saw a break out and we're kind of in a sideways consolidation. I do like that for new clients. To me, that looks like a pretty decent opportunity.
You know, big question, I get it all the time is gold. What do we do about gold? Well, yesterday created a buying opportunity for what I discussed. So at first. Again, the long in on the treasuries went up, U.S. dollar got strong, go got hit yesterday. To me, that's an opportunity. You look to buy gold when we have some pullbacks. Why? I mean, clearly, you're in or out of gold, or at least I am. and right now we're in. One of the reasons is we follow that golden Cross and the death cross. We had our golden cross. We actually got back in November pretty early. About five percent were carrying between seven and eight percent right now. Gold volatility is pretty low, after the pullback. We're starting to point up again on the momentum, I like that. At the bottom of the chart is gold relative to the S&P, performance. Who's performing better? And you can see I mean, over time, obviously, when you look at the markets it didn't do well, now it's kind of grinding higher as it relates to the S&P.
So let's wrap things up with our game plan.
Not surprising, neutral, just like I am right now . One positive, two neutral signals, game playing going forward. I'm sitting on about seven percent cash right now, waiting for a place to put it. Waiting to see if we break out or break down. Are there any opportunities out there, looking at how do we play the US dollar, it being so strong, looking at European companies that derive a lot of profits over here. So we'll see, right now definitively, a neutral signal, which I do update every Monday on Facebook.