We Don’t Need A Deal, But…

August 26, 2019|1:56pm

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Greetings from York, England. We’ve just completed our driving tour of Scotland where I learned that a “dual carriageway” sign is a rare and welcome sight from the driver’s seat and that most of the “roads” in the Highlands (and rural England) are merely golf cart paths that aren’t really wide enough for 2 vehicles – but still have 50 mph speed limits! We are working our way back to London and sadly our adventure ends with a flight back to the states on Thursday. But it will suffice to say that our time across the pond has been, as the Brits like to say, brilliant!

Looking at the markets, stocks continue to be whipped back and forth by the news from the front – the front lines of the trade war, that is. By now, I’m sure you are all well aware of the various tweets, threats, new tariffs, raised tariffs, and retaliatory headlines, so I’ll spare you the rehash of who said what and when. For me, the bottom line is this remains a news-driven, trading range environment and we need to (a) keep this in mind when things get hairy and (b) play the game accordingly.

To be sure, there has been some deterioration in the indicators. Yes, a negative macro argument can be made about the state of the global economy. And the latest narrative is that the recent escalation of the trade war leaves no way out for either side. However, I think the most important thing to keep in mind when the indices are diving, and things are looking dire is that in a news-driven environment – good news can happen.

Getting To The Key Point

I’ll make my primary point on this beautiful Monday afternoon in the UK by way of a question. So, what happens to that big, bad negative outlook if one takes the trade war off the table? Be sure to include this in your thinking because, from my seat, it is the most likely scenario. The only question in my mind is when a deal gets done.

Timing Is Everything

On that score, the good news is that the meat of the election season isn’t too far off. With corporate CEO’s blaming weakened growth and a lack of clarity about the future on the trade war uncertainty and the slowdown in the economic data, I believe most will agree that the global economy is either at or close to a tipping point. And come spring of next year, if this thing isn’t wrapped up, the President may not be able to get out of the economic hole that is being dug. And no, blaming Jay Powell for the economic slowdown isn’t going to fly with anyone who understands markets or economics. So, while some will argue that a deal isn’t likely to get done in the near-term, I’m of the mind that the fight is on a short leash due at least in part to the political season.

My thinking is that at this point, the economic hole isn’t very deep here in the U.S. To be clear, the economy is nowhere near recession, regardless of what the inverted yield curve might suggest. But remember, economic sentiment is critical at this stage of the game. As we talked about last week, it wouldn’t take much for CEO’s to start sitting on their hands with regard to expansion, hiring, capex, etc., given the uncertainty created by the trade tiff. And if you toss in the potential for a recession in Germany, a hard Brexit, significant slowing in China, and a falling growth rate here at home, the argument for the “tremendous” Trump Economy loses a whole lot of steam.

In other words, you can’t really campaign on your accomplishments if economic growth is falling. Sure, the tax cuts gave the economy a temporary boost last year. But currently, the trend of GDP is down, and the absolute GDP readings are moving in the wrong direction. As one analyst put it, not getting a trade deal done is like taking the trillion dollars spent on the tax cuts and lighting it on fire. So again, while no one on either side will ever admit it, getting the trade spat settled is politically expedient.

Ms. Market Doesn’t Need A Signed Deal

While a deal may not be imminent, my thought is that we will likely see some sort of agreement within the next six months. And let’s keep in mind that this is also the time frame that the stock market tends to focus on when “discounting” future expectations. So, while I’m just spit ballin’ here, if the two sides can stop playing games via Twitter and the press and show us that this thing isn’t going to get out of hand, the market can move forward and look ahead to better days.

What I’m attempting to say is that the market doesn’t necessarily need a signed deal anytime soon. No, traders just need to feel confident that a deal is going to get done. Once the market can assume a resolution is the most likely scenario, then it can move on.

Now for the bad news. If cooler heads fail to prevail and the trade spat continues to escalate, we very well could have a self-inflicted economic mess on our hands. As such, I am NOT saying that this market is without risk. No, I’m simply saying that logic suggests that a resolution is best for both sides, as well as our friends here in the UK and the rest of Europe.

But now I’m off to a river boat ride to explore York on a glorious afternoon. It is my sincere hope that my day isn’t interrupted by yet another tweet. Fingers crossed!

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

The bears tell us the market is doomed due to the idea that the yield curve has inverted and a recession may be on the way. However, our Primary Cycle board doesn’t agree. With 4 buy signals, 2 holds, and no sells, my favorite longer-term indicators continue to suggest that the bulls deserve the benefit of any doubt here.

This week’s mean percentage score of my 6 favorite models rose to 68.9% from 62.8%% last week (Prior readings: 71.1%, 70.3%, 84.1%, 79%, 83.9%, 81.1%) while the median also improved to 65.0% versus 63.4% last week (Prior readings: 70.0%, 68.4%, 86.5%, 80%, 86.7%, 82.5%, 68.5%).

The State of the Fundamental Backdrop

While prices moved wildly in stock and bond markets, the Fundamental Factors board didn’t budge an inch. And if you can pull yourself away from the tweets, the headlines and the algo-driven hysterics, the backdrop for equities remains upbeat.

The State of the Trend

Last week, I wrote that I was putting less importance on precise price levels and trends due to the fact that algo trading tends to exaggerate intraday movements. This week’s market machinations are a perfect example of this point. One minute stocks look ready to break out to the upside and the next – after a tweet or two – the major indices are threatening to break down. This is just the way the game is played in a news-driven, trading range environment. So, my advice is to put less emphasis on the near-term price movements and instead stay in tune with the big picture environment. And for now, this remains modestly positive for the U.S. stock market.

The State of Internal Momentum

As I’ve been saying the last few weeks, the Momentum board continues to be a problem and suggests that some caution is warranted. The good news is that several of the board’s indicators are beginning to become oversold. The bad news is that the current “state” of the board gives the bears an edge if the overall environment weakens further.

The State of the “Trade”

With stocks flip-flopping on every tweet, the typical “flow” of the early warning indicators has been interrupted. Thus, we will have to wait for the stars to align in order to have more confidence in making a mean-reversion call. At this stage, things are starting to move the bulls’ direction, but they aren’t quite there yet. But then again, it is the next positive tweet that will likely move markets and not an oversold condition.

Thought For The Day:

Never believe that a few caring people can’t change the world. -Margaret Mead

All the best,
David D. Moenning
Investment Strategist

David D. Moenning

Disclosures

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.


Disclosures

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.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

Mr. Moenning and Redwood Wealth may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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