Let’s keep it simple shall we: 2019 remains a battle for control. The forces of intervention want to “extend the business cycle” as Jerome Powell likes to frame it by any means necessary and, as I outlined yesterday (Beginning of the End), they are throwing the kitchen sink at it. 2019 has been marked first by a recognition that the rate hikes and quantitative tightening efforts of 2018 were leading to a collapse in markets. Hence first we saw a reversal in narratives to “flexible on balance sheet” and halting of rate hikes, to an outright cutting of rates and now a massive expansion in the balance sheet commencing next week.
Don’t call it QE they say, but ignore the fact that they are running a program equal in size to the annual US military budget. At $60B that’s exactly what it is. Massive.
Fed Chair Jay Powell: The economy is in a good place. Now here’s a $60B per month Treasury bill buying program, multiple rate cuts and daily repo operations. How stupid do they think we are?
But while none of these actions so far have produced any notable uptick in growth, inflation or hiring, they succeed at the actual primary mission: Keeping asset prices elevated. Corrections have been minimal this year, but bulls also can’t ignore the fact that any attempts of new highs have also been thwarted at every step of the way. Hence it remains a battle for control.
Bulls have the advantage on the intervention front. They are given every single helping hand necessary to reward failure. Central banking remains the ultimate exercise in socialism that nobody wants to admit to, but many of you implicitly understand to be true:
For everyone whining about socialism: It already exists.— Sven Henrich (@NorthmanTrader) April 21, 2019
It’s called central banking.
Socialism for the top 1%.
Bailouts for the poor = Socialism— Sven Henrich (@NorthmanTrader) July 29, 2019
Bailouts for the rich = Capitalism
Yes, I know I can’t help with the sarcasm, call it a feature not a bug 😉
And so bears are understandably frustrated as nothing ever seems to matter, especially considering that bears keep being quite right about the macro. 2018 was a tax cut induced sugar high and the artificially induced 25% earnings growth of 2018 has turned negative:
In the olden days one would’ve expected some sort of negative reaction in equity prices, but not in this time of permanent rescue operations. After all the negative earnings growth in early 2016 didn’t matter either as central bank intervention once again trumped all things macro. And so the bear case, the one that says things actually matter, remains the hard case to make even though markets keep hitting that historic valuation wall of market cap to GDP.
After all central banks have gone in full printing mode again, buybacks keep flowing through the system propelling stocks such as $AAPL to new highs despite produce the same earnings as in 2015 for twice the multiple, and now seasonality is turning favorable toward bulls in a few weeks, all of which could set up for a massive breakout above resistance, fundamentals be damned.
But note a difference to 2016, there were no inverted yield curves back then. And now that the yield curve has awoken from its inverted slumber and has begun to steepen, perhaps something will begin to matter after all. The classic signal of a steepening curve after all is that strength is an opportunity to sell, not to buy:
So far this has been the case in both 2018 and 2019 as all new highs have been sold. All of them. And before bulls become too jubilant about the liquidity runway under their feet they have to recognize that despite all this intervention there are still no new highs.
The proof of sustainable new highs remains missing. In fact here are a few updated index charts that keep crystallize the same message: The road to nowhere:
Transports: Rejected again below the 200MA on Friday:
Small caps: Same.
The banking sector: Where’s the breakout?
The best that can be said about these charts is that the 200MA is now rising slightly, but there is zero evidence of any breakout.
If this is what you get with multiple rate cuts and now $60B a month in Treasury bill buying by the Fed AND the ‘greatest deal ever’ China deal then consider me unimpressed.
Risk of a double top remains:
and rejection candles below resistance are seen on multiple key index charts.
So next week earnings begin to roll in. The hope is for “better than expected ” results as earnings estimates have come down consequence free as the central bank support mechanism has increased its feverish pitch to keep the price equation float.
I remain open to another larger volatility spike before a year end seasonality rally, heck I could make a speculative case for something like the outline below if the business cycle gains control over the intervention game and the current double top in charts actually plays out:
But that’s all speculative as of now as long as price and volatility remains contained, but it’s a risk off scenario to remain aware of if a global recession is indeed unfolding for such a scenario could unfold quickly.
On the strategic front Friday’s non China deal should make it clear that all the issues are not going away. And let’s be clear what Friday was: A marketing ploy. None of the issues were solved. On substance all they got was more soybean purchases in exchange for a tariff delay. Companies are not going to suddenly raise their outlooks or investments as a result. Besides, nothing’s been signed or outlined in detail. Anything can change.
So no, we remain where we have been, in a battle for control, between the forces of intervention and the forces of the business cycle. And the latter forces keep sending a formidable message in the form of the value line geometric index:
The broader market remains weak and doesn’t appear to amount to a hill of soybeans as key indices keep lagging behind the almighty $SPY:
I’ll leave you with some considerations: The 2009 trend remains broken, the 2019 trend remains broken, a potential double top remains in play. All new highs have been sold. All Fed rate cuts have been sold. There is no China deal, nothing’s been signed, sealed or delivered. I’ve been on the record stating that without a substantive China deal rallies to new highs remain sells. So far this has been correct and as of now we still don’t have a substantive China deal.
Yet with again emergency era sized intervention programs running through markets courtesy of central banks bulls have zero excuse not to make and sustain new highs. Failure to do so suggests the business cycle is gaining control and if that is to be then everything will change. Now we need to see what companies have to say in their earnings reports.
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