Market Thoughts
Markets are trying to stabilize after a big gap down on Trump’s threat of tariffs on Mexico on the eve of ratifying the New NAFTA. With that, don’t confuse today’s ‘stabilization’ with recovery. Here are the comments I made in my Live Trading Room and StockTwits Chat Room today:
SamanthaLaDuc
And that’s why I gave 25% chance to markets rallying into EOM/Friday… We have big gaps down. SPX 2,757.75 (-32.75) / Nasdaq 2,150.5 (-104.75) / Dow 24,905 (-285) Other notables: Oil -2%; Lumber -2.5%; Coffee -2.5%; VIX +7% You know my levels… see Daily Weather Report posted last night. Next Gap Fill in progress… $2743. Wouldn’t be surprised if we bounce on Monday but will update later on the chances.
The Crude dump yday is THE TELL for lower ahead… first it was Copper, then Yields, Now Oil… careful. Again, my SPX PT for next Friday is $2718…
We had The Tell yday: Bonds spiked (despite potential signs of yields bouncing at 2.2%), Gold spiked (out of nowhere), and Oil crashed (and not justified from inventory report). But before that we had the Expected Move taken out Tues -$2784-which I warned was Very Bearish. Again $2743 then $2718 have been my gap-fill PT in SPX since May 5th … but now we have a bunch of SPX gaps to the upside to get filled -ha! I contend we hit the $2700 area before we bounce to fill the $2856 gap … but I also have a 40% chance for my Flash Crash call. Sorry I’m not more confident on that yet but Trading/Analysis is Not A Game Of Perfect!!!
careful – folks are getting giddy about buying this gap down. I see no signs of it yet… $USD/JPY has a $108.50 multi-billion $ option expiring today. That’s my PT before I see clear to bounce. Just sayin’
SamanthaLaDucI was asked about my call for Mon. As I wrote earlier I was bearish into today (25% chance of rally into EOM) but my $2743 PT did not hit so,,. I think it will Monday AM… then bounce potentially before revisiting $2718 – just not sure if before or after NFP. Yes, Oil is CRASHING and NOT DONE but I would not be surprised to see sideways chop/no rally in the markets until post FOMC announcement June 19! Having said that, I think they will raise – June Meeting – which is totally not expected (Dec rate raises are expected, not June). I further believe the announcement will garner a knee-jerk reaction rally – to fill that $2856 gap – and then we reverse down breaking May lows on way past Dec lows. All the while, in my modeling, I see the chance of a Flash Crash – credit breaks somewhere causing liquidity to freeze and markets to fall very hard (none of this soft shoe we have currently) – gaining at ~50%. No joke, this market is Not Bullish.
On Trade Wars
Trade is important and we need the expansionary affects from trade to avoid a recession sooner rather than later. BOTH sides (all, actually) will see the global economy slow as a result so will be hard to find ‘safe havens’. On that, a rush into USD or Yen has it’s own complications. Bonds are ‘freakin bullish’ (yes, that’s a technical term I coined last month), but so were equities not too long ago. Despite the embarrassing commentary out of the white house, it is a fact that disrupted supply chains from trade wars will hurt the economy, companies and consumers. Companies are already scrambling to pay tariffs and find alternative supply sources all the while dealing with need to find new customers. This will fuel the case for economic contraction which will speed the onset of recession in the US. I give it months before economists are caught up enough to declare GDP will be revised to negative growth. Markets just don’t know it yet.
But they are starting to price it in…
On Yuan Devaluation Fears
Yuan devaluation fears are totally justified. A year ago when Trump implemented the first tranche of 10% tariffs on China imports, China responded with a 10% slow bleed lower in the Yuan – contributing the the USD advance by the way. Judging from this most recent response, I see a logical case – and a SOLID chart set up – for China to drop their currency an additional 15% to make up the difference as Trump implements the 25% tariff starting June 1.
On Risk to Upside
There is a chance, albeit small, that Trump caves. There is a chance, albeit teeny tiny, that China caves.
There is a chance, pretty good one, that Fed cuts. We could even rally on it. Before we crash.
Big Data Next Week
The ISM Manufacturing report comes out on Monday. This is often a good gauge of the factory sector. ADP will release its payroll report on Wednesday. Then on Thursday, the jobless-claims report is due out. This all leads up to the big jobs report next Friday. That last report showed the lowest unemployment rate in five decades. Talk about an Outlier ready to Revert with Velocity.
Macro Matters
Economic data summary as presented by John Kemp of Reuters:
- U.S. INTEREST RATE TRADERS are now pricing in almost two full cuts in the fed funds target before the end of the year. Fed funds futures for Jan 2020 imply an expected rate of just 1.95% compared with current rate of 2.39% (and target of 2.25-2.50%)
- U.S. TREASURY YIELD CURVE is moving deeper into inverted territory — with 10-yr note rates now more than 19 basis points below 3-month bills
- U.S. TREASURY YIELD CURVE has now inverted to levels that have commonly been associated with recessions in the past
- U.S. YIELD CURVE inversion is anticipating highest likelihood of recession since 2007 (before 2008 downturn). Recession risk is now well above levels that preceded recessions in 2001 and 1990
- U.S. CORPORATE PROFITS were up +3.1% in Q1 compared with the same period in 2018, decelerating from +7.4% growth in Q4 and +10.8% in Q3, and the slowest growth since the end of 2017
- U.S. CORPORATE PROFITS from the rest of the world (net of payments to the rest of the world) were down -2.5% in Q1 compared with the same period a year earlier, worst performance since Q1 2016
MOST IMPORTANT CHART RIGHT NOW
H/T @RealDavidJenson
Interesting Reads
the New York Fed asked the question: “Is There Too Much Business Debt?”
And South China Morning Post is asking: Does China have enough US dollars to survive the US trade war?
Have a great weekend all and thank you very much for your time and money! Yes, if it weren’t for your subscription fees, I wouldn’t be working for you. I’d be working for someone else! And I absolutely love what I do, so thank you!!
Samantha