Gone Fishing Newsletter: Where do we go from here?

This is an Intermarket Analysis chart review which graphically represent relationships (strong and weak) that can foretell how the undercurrents are moving to better identify where stocks/sectors/indices are flowing!

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After my well-timed down draft that started October 3rd, it feels rather odd to have such muted action past two trading days. In short, this sentiment sums up my thinking:

This market right now is a tough poker game. You don’t have to play many hands if the table is tough. Tight is right. Pick your spots carefully. Protect your chips. Consider this a freezeout tournament, with an insanely good structure. You won’t get blinded out if you are patient. Marlon Dee

I know the bullish thesis by most is to Buy the Dip with the argument: Earnings and valuation support starts kicking in with earning season at the same time stocks and indices are on nice levels of technical support. I get that and I want to jump on board but my job is to identify low risk entry (LRE) opportunities for you and I am still looking for the best hand to play!

First, let’s pull back before I dig in to my Intermarket Analysis charts for trends and trade ideas…

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John Murphy does John Murphy best

EVEN BULLS EVENTUALLY DIE OF OLD AGE…Here is a post by a 50-year veteran of Technical Analysis, John Murphy. I have to share the gist of his post in case you aren’t a subscriber to StockCharts. It is a very important, and I believe prescient, Market Timing Call.

No bull market has ever lasted more than ten years. So why worry?

I keep hearing that stocks should keep rising because the economy remains strong. I’ve heard that at every market top in the last fifty years.

History does show, however, that technicals usually turn bad before fundamentals. That’s because stock prices are a discounting mechanism. And that discounting is usually reflected first in falling stock prices (especially when bond yields rise). That’s why growth stocks were hit so hard. It’s also not a good sign when stocks fall on good news.

Back in January of this year he spied an Elliot Wave pattern. This week he spied a possible end of the fifth wave of a fifth wave. That’s usually a bad combination.

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The Other Side

Kevin Muir is one of my favorite macro writers. His latest is a bullish thesis – post sell-off – so I will present “the Other Side” of the credit stress argument in summary below. Article in full is here. In short, he forces us to choose: rates are increasing because of lack of demand (credit crunch) or rates are increasing because of an increase in supply. He argues for the latter and why this is bullish markets:

Don’t fall for the narrative that rising rates is U.S. dollar positive

What is the global economy suffering from? A rising U.S. dollar as rates are squeezed higher by the Federal Reserve. But what we really need is more supply of US dollars.

Yet what happens when corporations issue billions of dollars of new credit? The supply of U.S. dollars is increased.

So whereas many are freaking out about mega bond deals like Comcast’s 27 billion dollar issue last week, I take a more optimistic view. Sure that supply causes bonds to sell off and for the curve to steepen. But that’s happening for the right reasons. We want corporations borrowing and expanding the money supply.

(Now you might make the argument that more debt doesn’t fix the problem of too much debt, and rest assured, I know how that tale goes. But remember to focus on what is, instead of what should be.)

The Other Side of The Other Side – my take – is that this marks The Tipping Point of being bullish credit. Another words, we recently had highest Consumer Confidence and highest Business Confidence surveys – not seen since 2000. Both marked tops then. Reminds me of that Buffett quote, which was actually a Barton Biggs quote “‘A bull market is like sex. It feels best just before it ends.'”

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MARKET STRESS – Easy to see…

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BIG PICTURE – I’m still worried. Check out these updated Monthly charts for Breadth, Housing and Eurozone. They are still poor.

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 INTERNATIONAL MARKETS – DON’T LOOK DONE GOING DOWN

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GOLD – It is much better to be above $114 and the 50D then beneath it! AND Miners Bullish Percent Index is above the fold (2nd chart, yellow line). Gold relative to SPX is improving (3rd chart). And Yen may be the tailwind Gold needs to sustain this lift (4th chart).

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BANKS – May Bounce off that thickly drawn red line, but what then? Big banks reported double digit earnings gains for the last two quarters but then sold off! It’s not a good sign when stocks fall on good news… Velocity of the rate spike spooked them most likely as the higher rate path on heels of slower global growth AND higher oil makes ‘compression’ of valuations on companies harder so loan growth should slow. 

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OIL – Macro drives Micro and right now the stand off with Saudi Arabia has me reminiscing back to the 1973 Oil Embargo – which by the way drove not only Oil higher but inflation and rates higher for the better part of a decade. We are not ‘dependent’ on Saudi oil like we were back then or even 2014 (Thanksgiving) when OPEC increased oil production to cause the nascent US shale industry much pain as oil fell to $26. So is this current $70 handle on crude a sign of an even greater inflation shock to merit the Large Speculative bet that it will increase to $100 – by next year? Hedge funds are also long oil 10:1. Some on nature of supply/demand; others on impending Iran sanctions, and now Middle Eastern conflict with Saudi Arabia potentially removing supply from the system. I can’t help but wonder if we are at risk of an Inflation Surge from an Oil Crisis again.

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BONDS AND RATES – Short of an Oil Spike, China sell-off of US Treasuries or otherwise credit (supply or stress) event to continue a Rate Spike, bonds are approaching support around $112. 

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Differences between last week’s sell off and February’s collapse:

The number of new lows exceeded the extreme hit in the February correction.

“Nasdaq’s Ratio-Adjusted McClellan Oscillator was at -95 on Thursday. In the last 20 years (>5000 trading days), there have only been 8 readings lower than that.” -Tom mcClellan

The NAMO hit extremes on Thursday as did NASI –  falling below levels seen in February.

With that, we head into Earnings Season and according to FactSet, Q3 will have analysts looking for earnings growth of about 19% and sales growth of 7%.That is quite robust. Will they deliver? If they don’t, the market will likely discount in its disappointment and selling will continue. What may have already been a Tell that Earnings may not be as strong is a global expansion which has slowed:

• The OECD’s composite leading indicator points to a progressive loss of momentum in the advanced economies since the start of 2018 and is now at the lowest level since 2016.

• World trade growth peaked in the three months to January at 5.2 percent year-on-year but slowed to 3.8 percent in the three months to July, according to the Netherlands Bureau of Economic Policy Analysis.

• South Korea’s KOSPI-100 index, a useful proxy for global trade given the country’s heavy export orientation, peaked at the end of October 2017 and has since fallen to a 17-month low this week. John Kemp. Reuters

“The Fed Funds Rate now stands above U.S. core inflation (2.17%) for the first time in 124 months. .. This brings to an end the longest period of easy money in history.” – @charliebilello