Good Monday morning and welcome back to the land of blinking screens. While there are many topics to discuss on this fine summer day (earnings, inflation, trade, economic data, etc.) I think we need to recognize that the most important topic and the topic that is driving the action in both the stock and bond markets is the synchronized action/intention of the world’s central bankers.
To be sure, there are a great many central banks around the world representing many countries, many currencies, and multiple economic systems. But at this point in time, there is but a singular mission among them – to keep the global economic slowdown from morphing into a global recession.
From my seat, this is vitally important for one critical reason. You see, if there is one thing that I’ve learned about the stock market since entering this business in 1980, it is that investors need to stay on the same page with “the Fed.” Or more appropriately, the world’s central bankers.
As the late Marty Zweig famously said, “Don’t fight the Fed.” The reason here is simple – central bankers tend to get what they want.
To quote “Super Mario” (current ECB President Mario Draghi), central bankers have been known to announce they will “do whatever it takes” to get what they want. And traders around the world know that if central bankers want lower rates, lower rates is what they will get. So, instead of “arguing” with the guys/gals trying to manage the key economies of the world, it makes a lot more sense to “shake hands” with the Fed and get on the same page.
The Driving Force
And this, my dear readers, is what I see as the primary driving force behind the stock and bond market at the present time. Sure, the earnings parade may become a focal point in the coming weeks. But at the end of the day, the fact that Powell & Company have signaled that rates are going to come down in response to the global economic slowdown, is likely the key to the game.
We got fresh evidence of the #GrowthSlowing theme over the weekend as China’s most recent data was pretty punk. According to CNBC, China’s latest quarterly growth rate was the lowest in 27 years.
If you aren’t convinced of the global slowdown theme, take a look at the chart below from ANZ Global and the WSJ’s Daily Shot publication. The chart illustrates the leading economic indicators of the U.S., the Euro area, Japan, China, and a composite.
As you can clearly see, this chart is heading the wrong direction!
Now toss in the fact that the trade war between the U.S. and China looks like it (a) is taking a toll on both countries (as well as Europe) and (b) isn’t likely to end anytime soon.
From my seat, THIS is the reason that Jay Powell has done a complete 180 degree flip-flop since December and is now poised to cut rates.
In his semiannual testimony before Congress last week, Federal Reserve Chairman Jerome Powell as good as confirmed that an interest-rate cut is coming later this month.
You don’t need a PhD in Fedspeak to understand what Powell was telegraphing to Congress. “Based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted,” Powell said. For a Fed Chair, that’s about as plain talk as you’re ever going to get.
The Defacto World Central Bank
Another key point to focus on here today is that the U.S. central bank is becoming the defacto central bank of the world. I say this because, frankly, the central banks from Europe to Japan already have benchmark interest rates at ultra-low – or even negative – levels. And market participants have already pushed rates down about as far as they can go. Exhibit A here would be reports of the record $13 trillion of negative yielding bonds out there. Thus, the bottom line these banks have little room to cut rates and fight the slowdown.
In other words, the thinking is the Federal Reserve might be feeling the need to act as the central bank of the world. Wow.
Earnings on Tap
With all of that said, traders are likely to focus much of their attention on the current earnings parade, which begins in earnest today.
The good news is the bar has been set pretty darn low as companies and analysts alike have been hard at work cutting estimates for the current season. In fact, according to FactSet, EPS for the S&P 500 are actually expected to fall in Q2, which, in and of itself is a bit worrisome to some analysts.
However, I’d be slow to jump on the bear bandwagon here based on the state of this quarter’s earnings. Remember, the market is a discounting mechanism of future expectations. What is known is already baked into prices. So, as usual, it will be company guidance and the tone of the calls that will be important going forward.
Weekly Market Model Review
Now let’s turn to the weekly review of my favorite indicators and market models…
The State of My Favorite Big-Picture Market Models
There are no changes to the Primary Cycle board this week as the models designed to indicate the overall state of the market remain in great shape. So, as I mentioned last week, while an inevitable pullback is to be expected in the coming days/weeks, this board tells us to look at any weakness as an opportunity to add exposure.
This week’s mean percentage score of my 6 favorite models improved to 83.9% from 81.1% last week (Prior readings: 73.5%, 62.9%, 65.4%, 62.9%, 60%, 60%) while the median also rose to 86.7% versus 82.5% last week (Prior readings: 68.5%, 66.3%, 71.3%, 68.8%, 62.5%, 62.5%, 80.0%).
The State of the Fundamental Backdrop
The Fundamental board remains positive overall. ‘Nuf said with stocks moving to all-time highs.
The State of the Trend
It is said that the most bullish thing a market can do is make new highs. And with Chairman Powell virtually assuring traders that a rate cut is coming to help stave off the negative effects of the trade war and the global slowdown, the market is clearly looking to better days ahead. So, as I’ve been saying for some time now, “buy the dips” continues to be an appropriate battle cry here.
The State of Internal Momentum
While there is always something to complain about in this game (for example, I’d like to see the % of S&P 500 sub-industry groups technically positive higher here), the Momentum board sports a bright green hue at this time. And while a pause in the action is to be expected in the near term, the momentum readings suggest that any pullback is likely to be short and shallow.
The State of the “Trade”
In my experience, the best moves in the stock market tend to occur when “the stars are aligned” among the Early Warning board time frames. And while the setup for a pullback isn’t at “pound the table” levels (yet?) it is certainly heading in that direction. As such, mean reversion traders should be looking for the next pullback.
Thought For The Day:
In the right light, at the right time, everything is extraordinary. – Aaron Rose
All the best, David D. Moenning Investment Strategist
At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None
Note that positions may change at any time.
NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Redwood Wealth and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as investment recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
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