alice

NFTRH; Pre-Market Observations (med. priority)

This morning’s notable headlines…

The ever present Trade War…

 

Inflation by PPI marching higher…

Thing 1 needs to be tuned out, because it is already factored in and is at this point a macro food fight with the combatants slinging hash (and eggs, bacon and bananas) at each other. The market does not move (beyond knee jerks) in real time on inflammatory events.

Thing 2, the inflation data, is in line with the firm economy and the prospect that the Fed is on its tightening path, with the economic stimulus left to the fiscal policy makers in the Trump administration.

It’s amazing how markets work. SPX has reached the resistance area defined by the February, March and June highs and now out come the Trade War hysterics. The market has been bullish short-term for a top-test and the question is, ‘is it in?’.

spx

The weekly chart dials out the price to the context of the entire post election rally and could qualify as a failed test if it were stopped at resistance. But MACD has a sneaky bullish look and as noted above, the Trade War stuff is not a reason for the market, which has been rising since April fully aware of the brewing Trade War, to go down now and stay down.

What could be valid reasons?

  • The effect this ongoing news cycle has of chipping away at investor confidence over time…
  • In the midst of the summer (low volume) vacation season…
  • With earnings season at hand amid high expectations for corporate performance…

In other words, today’s news may or may not coincide with a market top (if applicable), but the driver would likely be earnings, not the headlines.

Regardless, with T-Bills paying out and likely to keep incrementally increasing payouts for a while yet as the Fed stays its course, taking on market risk does not look like a good bet in mid-summer. As we have noted, the VIX has been hammered and the first 2 days of this week have continued to raise bullish investor sentiment. The risk vs. reward has been poor and risk is rising.

I took on a couple more shorts yesterday but wanted to see how earnings season comes out of the gate (i.e. asking questions like ‘are they taking companies to the woodshed if they don’t significantly exceed expectations?’) because that is likely to decide when this drive to test the top ends. All of that assuming a bearish resolution, which is obviously just our operating preference at this point.

NDX (weekly) is testing its high.

SOX (weekly) is filling a gap.

Other indexes and sectors like the RUT (and Medical Devices) are either very strong and on an exact top test like NDX or are relatively weak and merely bouncing like the Dow (and Materials, Industrials, Financials, etc.).

The bottom line is that risk has been rising but the Trade War news, if it means anything at all to near-term market prices, would be more coincidental than fundamental if the market were to take a correction in July. Of more importance will be the market’s reaction to earnings season. A lot of expectations have been built into this pig over the last year.