This article is edited slightly from the original to clean up some wording and make points a little clearer.
All through the summer NFTRH had a “top-test” view on the primary US stock index, the S&P 500. We were 100% right on that; SPX spent all summer grinding upward to that test.
That is where the would-be market genius aspect of the analysis ends because it appears that the favored outcome of that test – that it would fail into a correction – will be negated in favor of the alternative outcome, which we have also carried forward. That outcome is a continuation with a measured target of SPX 3000+. So the favored and alternate views have traded places. The alternate now being that the bullish state of things is one big, post-Labor Day bull trap.
Okay, so you’re right for a long period of time, you realize the moment that the favored plan is aborting (per a subscriber update on Tuesday) and you adjust. It’s simple, if you’re keeping the pulse of things. You are going to be wrong sometimes about the stock market. That is the stock market’s job; to try to make you wrong. It is in the bias-free adjustments that success lay. We had a bullish view all summer and now it appears to be extending instead of terminating.
As noted in the real time NFTRH Trade Log on Tuesday I covered my single largest position, which was a short position on the world, ex-US (short ACWX) because I did not want to absorb what I thought was an oncoming bounce within its downtrend. Okay, all well and good. It appears markets are shifting to the alternate and near-term bullish plan.
But what of the whole global picture, including the US? Well, I found this article by Tom McClellan interesting for a couple of reasons.
- I was aware he was bearish over the summer, which was a threat to my top-test theme.
- It speaks to the disconnect between US and global markets; AKA the Good Ship Lollypop vs. the rest of the world.
All along the span of our projected SPX top-test I’d been hearing from a couple of people that Tom was expecting a significant correction in US stocks over the summer. I have to assume that his Eurodollar COT model was a primary reason. Below is his chart.
SPX ground upward as the Eurodollar COT degraded. This for me was another lesson in discipline. All kinds of smart people are going to have all kinds of smart indicators… but you have to go by what you see and what I saw was the top-test for reasons explained every step of the way in NFTRH, but beyond the scope of this article.
But the rest of the world as a whole did get on board with the bearish message of the Eurodollar positioning. That positioning now shows a positive forward indication for global stocks.
Tom goes on to talk about US tax repatriation as the primary driver, which touches on a very important subject that we’ve been focusing on ever since a Republican (in this case a policy-making Republican on steroids who seems a threat to tip over into ‘roid rage) took the White House.
The theme for the US has been fiscal vs. monetary stimulus/reflation/inflation, whatever you want to call it. The corporate tax repatriation is just one aspect of the greater tax code changes and deregulation across the corporate and public spheres that have benefited the US economy and stock market for the last couple of years.
Sure, the Fed is abdicating its monetary props, but government is replacing that with what I think is more traditionally sound policy (this is no comment on the cycle however, which I believe will end harshly at some point, monetary or fiscal policy be damned). The moment a fiscal stimulator got into office the Fed became less relevant to the stock market’s liquidity needs because that liquidity is coming from better areas than the strictly monetary magic show of Ben Bernanke.
The question now becomes whether or not Mr. Powell can take back enough slack in the monetary rope because ‘Roid Ragin’ Trump is not going to stop. Here again we need to pull back from going beyond the scope of this article, but let’s be aware that among our key indicators is our friendly Amigo #2 (AKA the monthly chart of the 30yr Treasury bond yield and its EMA 100 ‘limiter’). That red dashed line is a profound marker tested by time (as in decades).
Amigo #2 braced for and then hit the limiter months ago, and now he is waiting for the others (Amigo #1: SPX/Gold Ratio) and Amigo #3: 10yr-2yr Yield Curve) to also finish riding across the still bullish, still risk ‘on’ macro. Amigo #2 is going to likely decide between the usual manageable inflation with a deflationary resolution to clean the system and something that would ultimately be more virulent to the economy, if long-term interest rates break loose for the first time in decades. What happens if long-term yields change a secular trend and fly right up the economy’s tail pipe? With all that debt in the system?
We got a little far afield from this article’s original scope but believe me, there is much more to the macro picture beyond the Eurodollar COT, the 30yr yield or any other one or two indicators. It’s why you have got to do the work (or ideally, have me do it for you) each and every week by pulling together disparate signals and indicators into an adjustable plan. At this moment, we are back on plan after an adjustment and when considering the entire global macro, the plan is making sense. The plan does still have an alternate, however. It was important to have one previously and it is important to have one now.
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