Category Archives: Forecasts

Can Low Interest Rates Stimulate the Economy?

On the last day of July the Fed announced an interest rate cut by 25 basis points citing the reasons of “implications of global developments for the economic outlook as well as muted inflation pressures”.  Less than 24 hours later, President Trump announced 10% tariffs against Chinese imports of $300 billion.

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S&P 500 Cash Index Cycle Location 07052019

We blogged last week that the market was in a confirmed bullish trend despite the trade war and Fed rate cut noises.  Last week was a holiday week so the trading volume was low.  As of now, the market is still in a confirmed uptrend.  Since the last quarter of 2018, the market has been entirely news driven regardless of the underlining fundamentals, but the cycles have been functioning as they were supposed to.  So it’s best for us to listen to the tape and ignore the noises.

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What Trade War?

What trade war?  Trump and Xi made a truce at the G-20 meeting on Saturday.  It didn’t matter what Trump did, whether it’s real tariffs, Twitter threats of ever increasing tariffs, blacklisting Huawei and five more other tech companies, Trump couldn’t pressure China to make concessions!

China will never change its domestic laws to appease Trump just to make a trade deal.  China can wait it out, Trump can’t.  Under Trump’s trade war tactics, China didn’t make any concessions while demanding “respect”.  Trump made a big concession by throwing Huawei a lifeline just to resume the trade talks.

Trump will not be able to implement the 2nd batch of the tariffs on $300 billion Chinese exports as leverage as it’s getting closer to the re-election season.  The 2nd batch of the tariffs will hurt the US consumers more than China. Trump prefers business deals over cold war because he was able to go against the Washington anti-China hawks by letting Huawei off the hook this time.  In our opinion, there will not be a deal with the enforcement the Trump administration demanded.  Trump’s hands are tied to raise the additional tariffs.  The most likely outcome is that we are stuck with the existing tariffs for a while with no clear path to a permanent deal.

The truce will continue to help the market grind higher until early August when it has to deal with the 2nd quarter earnings recession.  Seasonally we already had a top in May, which is about sell in May and go away tendency.  July to October period is seasonally volatile and has a tendency to make a season low before the holiday season.

Now we are pretty sure the December 2018 low is a 4-year cycle low.  The first year in the 4-year cycle is pretty muddy because the fundamental problems exist while the market is trying hard to rise.  If the market plays out as historical patterns of the first year in a 4-year cycle this year, we will see a September/October low that will be the last chance to get on the bullish train.  The entry area is around the index 200-day moving average, which will be around S&P 500 2800-2850 in September/October seasonal low time frame.  The June low of  2728 should not be violated.

In the last two trading days of June, the small caps made surprising strong rallies two days in a row.  Many small cap stocks are breaking out while the mega caps remain pretty lame.  The smart money are pressing their bets on American domestic companies over the multinationals.  Small caps outperformed the S&P 500 index from Jan 2018 to July 2018 which was the beginning of the intense trade war.  The investors will prefer the small caps with the trade war threats lingering around.  It is a healthy sign to see small caps doing well in the beginning of the 4-year cycle.

In the short term, the S&P 500 index has made the 1st daily cycle bottom on 06/26/2019.  It is two days into the 2nd daily cycle that started on 06/27/2019.  We expect the market continue to grind higher to meet resistance levels around 3000 and 3077.  The current rally will continue throughout the month of July to press for all time new highs.

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Possible Retreat of The Rally

Since the Fed’s verbal intervention about a possible rate cut, the market rebounded from the 38% retracement level on June 4th.  The Sp&P 500 rallied 5 days for a total gain of 6.66% from high to low.  Then it bumped into resistance around 2900 level.  The volume of the five-day rally has not been impressive though.

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Can the Fed Alone Do The Heavy Lifting to New Heights?

With a hint of rate cut, the market immediately pivoted to the upside.  Last Tuesday, we sent out a member blog that detailed the reasons why we had a first valid rally attempt after last Tuesday’s close.  Now the question is when will the May high be taken out?

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