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NFTRH; Stock Market Turns @ Logical Point; Detailed Update

Our short-term theme has been that the new Fed chairman’s interest rate comments and Trump’s steel tariffs uproar would be unwound with a bounce before the market shows its cards, but then it could get back on the correction track. From NFTRH 489’s Wrap Up segment…

If I were a bear, on the short-term at least I would not like the level of uproar the Powell & Trump jawbones seemed to cause last week. So okay, a 2nd drop came about but it seemed like it was kick started. Going strictly by technicals however, the market retains potential for further decline.

This public post noted that Friday’s reversal and the rally to start the week were simply functions needed to relieve the negative media inputs.

Well, this morning we have turmoil in the markets likely due in large part to a very real input, Gary Cohn’s departure from the White House over Trump’s misguided tariff plan. This – in my opinion- leaves the administration leaning heavily toward protectionism, populism and jingoism. You don’t like what Paul Ryan is saying? Ignore him. You don’t like what your economic adviser is saying? Dismiss him (or let him up and leave).

At some point having a lunatic in the White House is going to matter, fundamentally. It is beyond me to know whether or not this morning is just another inflammatory news driven decline or the next leg of the ongoing correction.

SPX made a logical rally starting on Friday to get everyone who thought the media items last week were kicking off the next leg down off sides. The reasons I give more weight to today’s media items are a) the president’s economic adviser just left (a materially important event) and b) the market has bounced back to a logical termination point at the SMA 50.

spx

Many other US and global markets are at similar junctures, and NDX and SOX have been testing their highs, all within the bounce scenario. The bottom line is that in general, markets have bounced back to levels that very well could have seen a bounce failure and correction resumption.

From NFTRH 489 with respect to gold’s ratios to copper, industrial metals and palladium…

The above are early warning indicators to the cyclical environment. If they were to go south we would have a bearish case developing for the markets and economy.

Using Pall/Gold as an example, we see an indicator right on the cusp. Going forward we should factor indicators like this and several others to try to filter (to a degree at least) the noisy political/media environment in which the macro moves forward. A breakdown in Pall/Gold would be a negative signal. A breakdown would be a lower low that holds for a couple days.

The weekly view shows a similarly precarious, but not yet broken situation.

We are only managing a correction at this time. The target for the S&P 500 has been for a test of the low with a good chance of a gap fill on the SPX at around 2460. This could happen with a breakdown in Pall/Gold, but a real bearish signal (economic cycle turn) for this indicator (and let’s use the full range of them moving forward, not just one or two in a vacuum) would be in turning the moving averages down and then crossing them down.

Bottom Line

Stocks are taking a hit this morning on inflammatory news, but I am not willing to be as dismissive of this news as I usually am because it comes from technically logical failure points (example, SPX SMA 50) and because the president’s economic adviser just left the administration, with the world up in arms about a trade war.

This leaves a half crazy bull in a China shop running the country as if it’s a TV show. My apologies to the sensitivities of any Trump fans who may be left in the subscriber base, but that is how I see it and it is time for unvarnished honesty. I imagine you can take it with a grain of salt or you have already left the service by now.

As for the precious metals. Be patient. If Thing 1 falls apart (even for a harsh correction), Thing 2 (gold sector) will eventually find its footing because as illustrated by Pall/Gold above, the things of positive economic correlation would decline vs. gold and that would be healthy for the gold mining sector’s fundamentals. But again, patience.

As for interest rates, they are declining with the market disturbance and that is what we have been expecting. I am no long-term bond bull, but if the thing that went up with yields goes down, so too should yields in the near-term at least.

Think about everybody on the stock bull/rising yields/bond bear side of the boat and the need to get some of them over on the other side temporarily. The Fed cannot effectively distribute its own bonds with everybody hating them, after all.

We’ll smooth out the narrative as we move through the week. For now I am balanced in the portfolios – although I’d have to believe aligned to take a hit on a day like today. But I’ll look to increase bonds (esp. 1-3 year and maybe 3-7 year Treasury funds SHY & IEI), increase shorts (possibly) and maybe take some profits or limit losses on longs. But at the moment what I am going to try to do is not over react, based on one pre-market. Cash, as we have been noting for a long while now, is paying dividends. Cash is a position.