Tag Archives: weekly cycle

Correction is in Full Force

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?

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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