Has Anything Really Changed?

August 19, 2019|6:42am


Greetings from London. My wife and I are spending a couple weeks exploring England and Scotland, which so far has been, as the Brits like to say, “quite lovely.” Our visits to Westminster, Big Ben, Parliament, Buckingham, Kensington, Leeds Castle, Canterbury, Dover Castle and the local pubs, restaurants and taverns have been simply, “brilliant!” (P.S. My wife plans a mean trip and there is LOTS more to come including Edinburgh, St. Andrews and lost of other fun stops in Scotland.)

As I have mentioned a time or two over the years, one of the great things about traveling abroad from a business perspective is it gives me time to step back from the blinking screens and think about the big-picture. (Markets open 7-9 hours later than they do in Denver, so I can be a tourist during the day and then watch the markets over a glass of wine!) And then when markets get dicey – as they certainly have been recently – keeping the big-picture in mind can be very helpful when trying to stay in tune with the market’s primary cycle.

So, let’s take a moment on this fine Monday afternoon and review what we’ve got going on here. Please understand that I’m not talking about the daily tweets, headlines and/or market machinations. To be sure, the action has become volatile of late as prices have been driven to and fro by algos and the news flow. No, I’m talking about making sure I have a good grasp on the drivers of the action. And from my seat in a quaint little Airbnb “cottage” in Sloan Square, I conclude that there are four primary drivers here: the state of the trade war, the global central bankers, the economic data (both domestic and foreign) and perhaps most importantly, sentiment.

The Table Was Set

But first, it is important to recognize that prior to the recent dance to the downside, the table had already been “set” for our furry friends in the bear camp. Stocks had become extended to the upside. Folks were looking ahead to a series of rate cuts by all kinds of central bankers due to slowing economic data. The historical seasonal cycles were calling for a pause/pullback phase. And investor sentiment had become overly optimistic.

So, given that the market was overbought and over-believed, the bad news from the trade war acted as a trigger for some downside action. The key point here is that the pullback itself shouldn’t have come as a big surprise. Remember, typically, this is a two-steps-forward, one-step-back game.

Has Anything Changed?

The next point is that when there is a sudden change in trend, it is important to try and determine if anything has changed from a macro perspective. For me the answer to this question is, not really.

Yes, the President took everyone by surprise when he ignored his advisors and decided to pile on additional tariffs on Chinese goods. And yes, the inversion of the 2/10 yield curve did become official. And yes, I also recognize that the last week’s big down day was accompanied by some pretty crummy economic data out of both Germany (GDP came in at -0.1% for the quarter) and China. But the idea that stocks should suddenly tank on the technical inversion of the yield curve is borderline comical and smacks of algos gone wild.

But in reality, NONE of this is new! We all know the President likes to fly by the seat of his pants and negotiate through the press. We know that “Tariff Man” thinks his base likes his actions. We know the central banks are all trying to offset the negative impacts of the U.S./China trade war and to keep their respective economies out of a Japanese-style deflationary spiral. And to anybody that has been paying attention, #GrowthSlowing isn’t exactly newsworthy at this point in time.

Hence, my position is that despite the sometimes-alarming declines in the major stock market indices, the backdrop hasn’t really changed.


But (you knew that was coming, right?)… This does NOT mean that investors can simply turn a blind eye to the roller coaster ride occurring on Wall Street. You see, one of the primary lessons I learned from the financial crisis and the ensuing European debt crises is that investor/consumer confidence can turn on a dime these days. Today, everyone has a news feed on their phone. Thus, everybody on the planet knows when stocks dive 800 points of fears of recession (don’t get me started on this one!). Everybody knows when Germany’s economy shrinks. Everybody knows that China is retaliating and has a “nuclear option” that could strike fear in the hearts of investors everywhere. And everybody knows that the trade war is causing economic problems in a LOT of places. Problems that are likely to only get worse over time.

The important thing here is that “everyone” isn’t just individual investors. No. Today’s “everyone” includes directors on corporate boards. CFO’s. Bankers. And CEO’s.

Bad News Travels Fast

Here’s the problem in a nutshell. Bad news travels fast. As the saying goes, bad news travels seven times as fast as good news. And what happens when CEO’s, bankers, CFO’s, and individual investors get a raft of bad news? Bad news that causes the term recession to be used on an hourly basis on Wall Street? The short answer is, nothing.

No new discretionary spending. No new hiring. No new lending. And this, dear readers, is the problem. IF (note the use of capital letters) Mom & Pop get scared enough to start canceling/postponing purchases, and IF bankers become worried enough about their capital requirements that they pull in the reins on lending, and IF CEO’s/CFO’s start to fear a recession, the bottom line is that all of our players could stop spending those discretionary dollars. They delay the opening of that new plant. They put off hiring for a quarter or three. Oh, and that vacation home in Colorado? Fahgettaboudit.

The key point is that if you put a dent in marginal spending in a global economic expansion that is, well, marginable at best, you are left with… wait for it… the “R-Word.”

Wanna see all those discretionary dollars – the dollars that mean the difference between positive and negative GDP – stop on a dime? That’s right, start a trade and currency war. Flush the benefits of your tax cut right down the drain. Scare the bejeebers out of the consumer because their 401K’s just dropped 15%. Yea, that’s the ticket.

Yes, I can be accused of being flip here. Yea, I’m not at all happy with the fiscal/economic games being played. And yes, there is more than a hint of sarcasm being used in my meandering market missive.

But the point is that “sentiment” is a crucial part of the economic growth game here. And when you scare your players, they will simply sit on their hands. And from my seat, this is all really all it takes to create the next recession. Ughh.

The Good News

Now for the good news. This is the type of recession/scenario that can be cured quickly. Yep, that’s right. Those frowns can be turned upside down in an economic heartbeat. Wanna get things going in the right direction again? No problem. Try reversing the news flow and see what happens to investor/CFO/CEO sentiment. My bet is if you “fix” the trade war (and no, I don’t care what “winning” looks like here from a political standpoint – I’m just talking about the effects on the markets) and put a stop to the gloomy economic headlines, that things just might turn around.

So, let Mr. Powell knock rates down a couple more notches. Let Super Mario press play on the next round of QE. And let the administration find a way to “win” their trade war. After that, my bet is happy days will return at the corner of Broad and Wall. But until then, we should expect a trading range environment, which in the big picture, isn’t all that bad.

Weekly Market Model Review

Now let’s turn to the weekly review of our favorite indicators and market models…

The State of My Favorite Big-Picture Market Models

It was yet another wild ride on Wall Street last week as the news flow continued to drive the action. The Primary Cycle models saw some slippage as the Risk/Reward model fell into the neutral zone and my Desert Island model lost some ground. However, I think the model remains in decent shape and we continue to believe that the readings of the Primary Cycle and Fundamental boards supports the idea that investors should treat this pullback as a buying opportunity. 

This week’s mean percentage score of my 6 favorite models fell to 62.8% from 71.1%% last week (Prior readings: 70.3%, 84.1%, 79%, 83.9%, 81.1%, 73.5%) while the median also dropped to 63.4% versus 70.0% last week (Prior readings: 68.4%, 86.5%, 80%, 86.7%, 82.5%, 68.5%, 66.3%).

The State of the Fundamental Backdrop

Global central bankers are all moving to ease monetary policy in an effort to fight the global slowdown made worse by the trade war – so the monetary backdrop is positive. The Economic model is still positive but is starting to show signs of wear. Earnings remain solid but are a lagging indicatory. Next, and probably most importantly this week, the Inflation model upticked but remains solidly positive. However, this remains something to watch closely.

The State of the Trend

Last week, we were looking for some additional weakness and that’s exactly what we got. The good news is the important support zones seen in the channel breakout systems held. As such, the bulls can continue to argue their case at this time. But with the news flow clearly driving the action on a daily basis, I for one am putting less stock on precise price levels and trends due to the fact that algo trading tends to exaggerate intraday movements.

The State of Internal Momentum

The Momentum board continues to be a source of consternation as we lost a key intermediate-term indicator last week – the I.T. Breadth Model. In addition, the L.T. Volume Relationship model is positive by the skinniest of margins. As such, the message from the board is that some caution is warranted.

The State of the “Trade”

For the past couple weeks, I’ve been saying that I would not classify the current state of the Early Warning Board as a “table pounding” setup. And while this is technically still the case, the table is beginning to lean heavily toward the bull camp. However, in a perfect world, I’d like to see some additional time go by and perhaps another scary down day or two in order to reach a “table pounding” type of extreme.

Thought For The Day:

There are no traffic jams along the extra mile. – Roger Staubach

All the best,
David D. Moenning
Investment Strategist

David D. Moenning


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.


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