The Correction is Not Over
- Sunday, 18 August 2019 19:10
Last week, the bears tried really hard to knock it down to pass the first initial S&P 500 selloff low @ 2822.12. S&P 500 and NASDAQ successfully defended the August 5th selloff low, but the DOW was not able to defend the first initial low and made a lower low on August 15th.
All three indices fell below last month’s low on the first trading day of August. August started on a very weak note. August has been the worst month for stocks for the last 10 years and September has been the worst month for the last 100 years. So seasonally we are in the worst period of the entire year.
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Correction is in Full Force
- Sunday, 11 August 2019 19:18
In our last blog, we thought the 50-day moving averages of the three indices may provide temporary support. But on Monday, August 5th, all three indices plunged to violate the 50-day moving averages with heavy volume. The heavy selloff has changed the characteristics of the bull market that started from the December 2018 low.
The market was surprised to find out that 10% tariffs on the additional $300 billion Chinese imports will take place on September 1st. The trade war risk was always there, but the market chose to gloss over the risk and chased the technical price momentum. The trade war started as fixing trade deficit with China, now it has morphed into a currency war. A currency war has far more reaching impact than a trade war because it will endanger the global financial system. The reason why the market has down played the trade war risk is the belief that Trump needs to have a trade deal in order to be re-elected. With the escalating trade war, the market will not rally even with lower rates.
From Trump’s words and behavior, right now it appears that Trump may not care if he gets a trade deal or not before the re-election. We do believe that if the market crashes 10% from here, Trump will care and that’s when a trade deal will be made, whether is good or bad. So the market is the only one that can discipline a reckless president.
The FAANG stocks have not taken out their respective all time high since the December 2018 low was made. It is very interesting to see the old leaders are not leading at this juncture. Perhaps it is sending a message about the next bull market. Many of the biggest ideas in technology over the past decade have centered on how people communicate, consume, transact and travel. Over the next decade, however, the most profound innovations—and investment opportunities—could be on factory floors, in operating rooms, at mining sites and energy facilities.
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Can Low Interest Rates Stimulate the Economy?
- Sunday, 04 August 2019 18:14
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
- Sunday, 07 July 2019 20:40
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?
- Sunday, 30 June 2019 19:05
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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