BULL MARKET Confirmed; Disconnect and Economic Weakness Worries Persist
By the Curmudgeon
Dow Theory Bull Signal Triggered:
The U.S. stock market surged Monday with all popular averages up over 1%. Importantly, the Dow Jones Industrials and the Dow Jones Transportations both closed above their February highs at 26091.95 and 10632.49, respectively. That triggered a Dow Theory bull market confirmation, because the Dow Theory Sell Signal that's been in force since December has now been reversed.
The late Richard Russells PTI (Primary Trend Index) is hitting new highs, which reinforces the bullish case. Also, most U.S. stock indexes are above their respective 65-day MAs while the cumulative advance/decline lines for the All Exchange, NYSE and Nasdaq are now all positive and above their 50-day MAs.
Below is the PTI chart as of April 2, 2019. The PTI continues to be at a new all-time high:
Disconnect says JP Morgan Research Note to Clients:
U.S. equities rally over the past quarter is showing a huge disconnect with the downside risks according to a JP Morgan note. Markets appearing to price in only a 15% chance of a U.S. recession, a sharp reduction from 66% at the start of the year. Similarly, U.S. credit markets appear to be currently pricing between 10% and 25% chance of a US recession. In contrast, the 85bp fall in 5-year U.S. Treasury yields from their early November peak points to 80% chance of a U.S. recession on our calculations.
Bloomberg - Many Reasons to Fret About the Global Economy:
According to Michelle Jamrisko of Bloomberg, the global economy is wobbling in 2019, giving rise to recession fears and forcing the worlds central banks to consider renewed easing of monetary policies.
There have been repeated economic forecast downgrades by governments and other authorities this year. On Tuesday, the World Trade Organization slashed its 2019 trade projection to the weakest in three years (Tariff War Will Hammer Global Trade Growth This Year, WTO Says). The Organization for Economic Cooperation and Development (OECD) cut its economic forecast last month and warned of downside risks that could lead to an even worse outcome.
The global expansion continues to lose momentum, the Paris-based Organization for Economic Cooperation and Development said as it downgraded almost every Group of 20 nations economy. Growth outcomes could be weaker still if downside risks materialize or interact.
Despite all the hoopla, there is still no trade deal with China and tariffs are hurting global growth. Yet the U.S. stock market has repeatedly celebrated such a trade deal for months- as if it was a done deal. Bloomberg notes that Chinas policy uncertainty has been especially pronounced as analysts try to pick apart how officials will manage the slowdown there.
Across the U.S., Europe and Asia-Pacific, economic data released this year have been surprising on the negative (down) side more often than normal. And thats especially disturbing considering economists poor record of predicting recessions.
Finally, BREXIT has become the weight that wont go away in the U.K., still holding back capital spending and broader economic growth. The British Chambers of Commerce said this week that investment intentions are at the lowest in eight years as firms refuse to commit to projects in such an uncertain backdrop.
Has the Fed Eased Enough in 2019? Apparently NOT!
With additional fiscal stimulus on hold due to massive budget deficits, the Fed has eased financial conditions as reflected by this Bloomberg chart:
Despite President Trump saying the U.S. economy is super strong and the stock market is rallying, the administration seems to be worried about an incipient recession later this year or early in 2020.
U.S. National Economic Council Director Lawrence Kudlow told The Wall Street Journal (WSJ) in an interview the administration would like to see the Fed lower its benchmark federal-funds rate by half a percentage point (50 bps), which would put it in a range between 1.75% and 2.00%. Kudlow said he believed rates needed to be cut as a precaution. Kudlow noted the inverted yield curve which has preceded past recessions and added: I dont want any threats to the (economic) recovery. Im aware of the inversion of the yield curve, and Im aware of the rest of the worlds weak economy, he said. Apparently, Kudlow still believes the U.S. economy is in recovery mode almost 10 years since the last recession ended in June 2009.
Meanwhile, the Fed Funds futures market, which had forecast no chance of a rate cut this year prior to the March 2019 Fed meeting, now predicts a 40.6% probability of a 25 bps cut and a 15.7% chance of a 50 bps cut by the December 2019. That can be seen from this chart:
Leutholds MTI Still Neutral:
As of April 2, 2019, Leutholds Major Trend Index (MTI) was at 0.99 with 0.95 to 1.05 considered to be Neutral. Leuthold CIO Doug Ramsey provided this commentary today:
Theres still the possibility that the move off the late-December lows is a bear market rally, but obviously those odds diminish as the S&P 500 closes in on its September 2018 all-time high. Still, its worth remembering that the bear markets of 2000-2002 and 2007-2009 produced a total of five bear market rallies in the +18-24% range.
The upswing in the Russell 2000, however, might be more confidently called a bear market rally; that index is still below the rally peak established five weeks ago, and 11% below its August 2018 bull market high. We view the Russells non-confirmation of the new rally highs in the S&P 500 and DJIA as only a minor negative and would give the junior index some time to catch up. However, the weakness in both Small and Mid-Caps during the last six weeks points to underlying weakness in breadth thats not being captured by the various advance/decline lines.
The Intrinsic Value category remains a drag on the MTI at -380 but is well below the cycle extremes seen in January 2018 (-621), and again in September 2018 (-629). Remember, at both of those peaks the bulls were crowing that valuation is not a timing tool. Now, despite only modest improvement in most valuation metrics (especially on those using normalized fundamentals), cheaper valuations has emerged as a key pillar in the bullish line of reasoning. However, there are many examples in which the markets valuation peak occurred months before the final price peak (1989-1990 and 2007 to name a couple), and 2018-2019 might well be such a cycle peak.
In the 40 years I've been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality... Asset markets are in the sky, and the economy of the ordinary people is in the dumps, where their real incomes adjusted for inflation are going down and asset markets are going up.
When you print money, the money does not flow evenly into the economic system. It stays essentially in the financial service industry and among people that have access to these funds, mostly well-to-do people. It does not go to the worker.
Market forces will one day crush the Federal Reserve. One day, the market forces will reverse.
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Good luck and till next time ..
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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