Tag Archives: weekly cycle

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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Decision Time

The Fed is about to cut rates for the first time since 2008 as the trade war is weighing on economic growth.  Are the rate cuts truly needed to support the economy or is the Fed under political pressure to appease the White House?  Last time, the Fed cut rates in 1998 to prevent a slowdown caused by the Asian currency crisis.  We all know what happened after the cuts.

This time is very similar to the 1998 rate cuts.  The economy is not weak and the rate cuts can only create asset bubbles like easy money always does.

Short term, it is over bought with extreme low volatility.  A summer selloff is still on the radar.  This selloff will create the last opportunity to get in the market before a grand bull market unfolds.

Long term, this market still has room to run. 

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Microsoft Beat the Top and Bottom Line, So What?

Last Thursday after the market close, Microsoft announced earnings that beat the top and bottom line.  MSFT ran up immediately after the earnings release, it made a new all time high on Friday’s open, but it was sold off straight from the high at open with higher than usual volume.  This is a topping signal, Microsoft stock has topped on a great earnings report.

Microsoft is absolutely the bull market leader which is included in  DOW, S&P and NASDAQ, all three indices.  When a market leader like Microsoft sells off based on great earnings beat, it gives out hints about the general market condition.  The true leaders of a bull market are the last ones to show signs of weakness.

In our last blog, we warned the S&P 500 cash index upside resistance at 3000 and 3077.  It broke out at 3000 marginally, not it is showing the bull market fatigue.

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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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The Unusual Madness

The stock market usually is chaotic and full of madness.  This time with a Twitter happy President, we have had unusual amount of madness that can make anyone dizzy.  The President’s economic policies are totally geared toward manipulating the stock market with the end goal of re-election in 2020.

This is evident with the passage of the Tax Cuts and Jobs Act of 2017 in December 2017.  Normally a fiscal stimulus is not deployed after an extended period of easy money policy, it is reserved for bad economic times to save the day.  The market was anticipating the good news in 2017, therefore it didn’t even have a 5% dip throughout 2017, which is quite unusual.  The equities surge in January 2018 promptly produced a two-year cycle top.  The market was sucker punched between the trade war and rate hike in 2018. Therefore the 2nd half of the four-year cycle was cut short, it couldn’t surpass the first two-year cycle high and only lasted seven months from February to September 2018.  The four-cycle that started in February 2016 ended in December 2018 with a total of 34 months.  The presidential economic policies definitely shaped how the four-year cycle played out.  It produced a rare four-year cycle bottom in December which is totally against seasonal tendencies.

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