DOW THEORY
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.
Readers are invited to
vote for their favorite quote by emailing the Curmudgeon: ajwdct@gmail.com
.
Good luck and till next time
..
The Curmudgeon
ajwdct@gmail.com
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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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