The final phase of a bull cycle is the most deceiving. It is the time when things are at their best, optimism runs wild, equities can do no wrong and any warning signs are dismissed as equity price action valiantly defies the reality that is to come.
It is also a time when complacency makes a comeback as big rallies emerge following initial larger corrections. 2018 was a year of big corrections. 10% in February, 20% in Q4. Now a 25% rally. Not signs of a stable bull market. It is precisely the aggressive counter rallies near the end of cycles that can be the most awe-inspiring and reason defying, yet they can also be the most dangerous while being the best opportunities to sell at the same time.
Let’s get real: The liquidity machine can hide reality only for so long and that is: Things keep slowing down. Cycles don’t turn on a dime, they take time and that is what we are seeing unfold and the signs are plentiful. From Japanese industrial production going negative the past 3 months to home sales in the Hamptons slowing to the slowest level in 7 years. I’m using these couple rather random examples to illustrate a point: The slowdown is as broad as it global:
Oh yes, even Friday’s Q1 GDP report reeked of deceit and the headline is hiding theslowdown in plain sight:
“The economy isn’t doing nearly as well as that 3.2% annual growth rate for gross domestic product reported Friday by the Commerce Department.
The heart of the real economy — private-sector consumption and investment — slowed sharply in the first quarter to a 1.3% annual rate, the slowest growth in nearly six years.
“On the outside, it looks like a shiny muscle car. Lift the hood, however, and you see a fragile one-cylinder engine.”
Consumer spending rose only 1.2% in the first quarter, after healthy 2.5% growth the previous quarter. Spending on durable goods plunged 5.3%, the worst since 2009.
Business investment also slowed, to 2.7% from 5.4%. Investments in structures, such as factories, offices, stores and oil wells, fell for the third straight quarter. Investments in equipment — computers, airplanes and machinery — barely grew, rising 0.2%.:
A GDP print so outsized to reality it made made a mockery of the NY Fed GDP model:
Forecast 1.5% but see a 3.2% result. Sure.
For added entertainment I present the Atlanta Fed model which projected 0.4% growth just 7 weeks ago:
This is banana republic like GDP forecasting. Blue chip consensus was 1.5% but the 3.2% result was “boosted by one-off factors big improvement in the trade balance, a big build-up in inventories, and a big pop in state and local government spending”
Not sustainable and not reflective of the true state of the economy. Yet we still see earnings beats from lowered expectations, but earnings will also have to catch up with the slowing reality:
So far investors haven’t cared about that emerging reality, they have cared about liquidity, dovish central banks, buybacks and a China deal.
The prevailing fantasy: We can keep this up forever because the Fed has our back and a China trade deal will solve all problems:
Oh yes, rising wedges do matter.
Think these 3 companies are not reflective of global growth? They sure are.
But they just had to jam into semis all year ignoring this reality:
In process forcing capitulation in equity shorts:
Right at the moment of historic low volatility across asset all classes:
…while believing volatility will never be great again:
This is a dangerous combination that sets up for another volatility event to emerge.
For now the relentless 2019 market trend remains fully intact, individual stock bombs notwithstanding. Are we ready to blow-off as I asked this week? It looks so at the moment, but if that is so the sustainability of any such move has to be carefully evaluated as indices such as $NDX are highly overbought and confined to ever tightening rising wedge patterns:
In the spirit of keeping things real some key technical observations and charts in the video below:
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