While we have been medium term Bearish on stocks and oil since early October, we published a flurry of newsletters between December 7th and 12th signaling even more trouble ahead. Our 3 Tests and a Tumble letter a couple weeks ago further detailed the markets penchant to bust through support after a price level has been clearly tested 3 times. This week stocks broke through the 10 to 12% correction support zone on its 4th attempt and quickly proceeded to our next target in the 2400’s basis the S&P 500 Index. Stocks appeared optimistic before the Fed rate hike today, hoping beyond hope that Fed Chair Powell would Thread the Needle of accommodation and austerity and promise no more rate hikes in 2019 unless economic data heated up. Powell’s verbiage demonstrated concern of a negative market reaction, but although he tried to support stock market Bulls, he can not entirely hide the fact that the Fed feels the US economy is still strong and likely requires more rate hikes ahead. The market wants to hear the Fed say it fears a much weaker GDP and the need to stop rate hikes entirely. It was a no win situation for the Fed in its illusive effort to reach the nebulous neutral Federal Funds interest rate.
A consensus of economists are forecasting a US recession in 2020 with increasing risk of trouble by mid-2019. Such economic consensus of gloom longer term is a positive given their poor track record. Perhaps the weakness developing near term will satiate the need for the cooling the Fed and economists feel is needed down the road. The top concern that CEO’s and analysts continue to hone in on are China Trade concerns slowing global growth. This is a valid concern that would likely makes its biggest impact well before the specious 2020 recession consensus. As there are few positive catalysts to look for support in this stock market, we have also focused on China for months highlighting China Trade proxies as our ‘tell’. With weakness persisting in trade sensitive commodities – Copper, Soybeans, Aussie$ and Oil – there is a dearth of reasons to expect a new uptrend in stock prices. An agreement between Trump and Xi of merit should send these commodities soaring along with the stock market.
Short term oversold sentiment extremes at major price support levels are worth a bid for traders within the next 2 weeks, but above normal cash positions will remain, absent any major news on the Trade front that could elevate earnings expectations and stock valuations. While there is an oversold level of elevated fear in the markets short term with extreme Put option purchases, the volatility index (VIX) remains modest relative to the 15% drop in the major market averages since October 3rd.