Thursday the S&P closed below the lower boundary of its intermediate term uptrend, technically negating the trend. However, it was less than a point away, so I postponed making the call. Then Friday, the futures up big before the open---I thought OK, the test was unsuccessful. Then the Market opened down big on a lousy nonfarm payroll number---I thought OK, that uptrend is going to be broken. Then the S&P made a big intraday reversal and closed well over that lower boundary, confirming that the test was unsuccessful. Fundamentally, it suggests that a rate hike is off the table.
Aside from giving me a headache from the up and down action, an interday reversal this big tends to portend a strong move in the direction of the close (up). So I think it likely that at a minimum the S&P will go back to test the 1970 level; and it could go higher. While that is not my bias, if Friday’s action was anything other than a vicious short covering rally, it looks like the QEInfinity euphoria is alive and well.
While the long Treasury remains in a short term trading range, it made steady progress towards the upper boundary of that range. This move to higher prices (lower interest rates) is consistent with a weak economic outlook.
GLD spiked on Friday, lifting it off the lower boundary of its very short term uptrend and pressing against the upper boundary of its short term downtrend. This pin action also suggests lower interest rates.
The VIX negated its short term uptrend Friday, re-setting to a trading range. However, it remains in the mid-20’s suggesting additional volatility ahead.
Last week’s economic was again negative on balance: positives---personal spending, consumer confidence, the ADP private payrolls report, the September Markit manufacturing PMI, construction spending and light vehicle sales; negatives---personal income, August pending home sales, the Dallas Fed manufacturing index, August factory orders, the August trade balance, the Case Shiller home price index, weekly mortgage and purchase applications, Chicago PMI, weekly jobless claims, September nonfarm payrolls and the ISM manufacturing index.
The primary indicators were personal spending (+), construction spending (+), personal income (-), ISM manufacturing (-), nonfarm payrolls (-) and factory orders (-). So they too were discouraging. If this trend continues this week, I will likely lower our forecast, again, especially if we get no help from the rest of the world.
The 80/20 rule is crushing the economy (medium):
Overseas, the stats were almost universally poor: September EU CPI fell below 0 and its unemployment was unchanged, Japanese unemployment rose, August German retail sales dropped, September manufacturing data from Japan, China and the EU were all disappointing. Plus the Indian central bank lowered rates and capital continued to flee the yuan.
***overnight, the EU services PMI, EU composite PMI and EU consumer confidence came in below expectations; the World Bank reduced its growth forecast for China; Saudi cut oil prices.
As I noted above, Friday’s pin action in the face of really poor nonfarm payrolls and factory orders suggests that the QEInfinity/no rate hike crowd retook the initiative. I don’t doubt that these numbers likely have the Fed chatting about changing the narrative from hike to no hike. What I am a bit puzzled by is that the growing prospects of a recession has got investors feeling all warm and fuzzy. Of course, that’s me and I am talking my book. But as long as investors’ sole concern is that money supply remains easy, however, economically ineffective it is, then stocks will go up. As Keynes famously said ‘markets can remain irrational longer than you can remain solvent’. The good news is that our Portfolios have lots of cash, so insolvency is not a worry.
Update on valuation (medium):
The latest from Jeff Gundlach (medium and a must read):
This Week’s Data
The September Gallup consumer spending index was lower than its August reading.
Too much Fed power is the problem (medium):
More from the optimist in chief (medium):
International War Against Radical Islam
The war in Syria seems set to escalate (medium):