Skyfall

The defunct Chinese space station, Tiangong, is set to fall to earth this weekend. The problem is, we just don't know where. This event is what economists would euphemistically call an "externality".

Cynics might claim this as proof of Chinese intellectual property theft, given the space junk was built on the same plans as the U.S. Skylab. The ill-fated American station haphazardly fell to earth in 1979, landing mostly in the Indian Ocean, just missing Australia.

For investors, an event so threatening, arriving unannounced, is not confidence-inducing to say the least.

The recently acquired risk appetite of investors has been sorely tested by the political events of the past few months. In a classic 'Art of the Deal' bait and switch, Donald Trump gave latecomer investors a confidence boosting tax cut only to pull the rug out by positing a 'winnable' trade battle.

The market quickly got over its skis in January on tax reform optimism. Then, fearing a destabilizing tariff war, a cleansing correction ensued, shaking out the weak hands. I now believe that the double-bottom re-test pattern that subsequently played out is giving the aging bull market a new lease on life.

The most recent casualty has been widely-held Facebook. It adopted an imperious response in the 'face' of a crisis. Its chart pattern now looks like the flight path of the Tiangong.

The 'deer-in-headlights' look on Mark Zuckerberg's face, shows how quickly confidence can morph into hubris. The Harvard frat-boy culture that permeates Facebook's headquarters is not helping the cause. Zuck is again skipping class by not appearing before the UK hearings today.

It is also a potential sign that investors are getting a bit nervous about having an overweight in 'FANG' stocks. The buy-and-hold crowd is restless, given the recent step-change in market volatility The necessary fuel for a future rotation is currently being stock piled by sellers of these over-owned stocks.

Materials, Energy, Industrial cyclicals held up amazingly well given the perceptions that a trade war was imminent. Oil is strengthening and is set up for its seasonal run. The copper market is similarly poised to rise on a restoration of confidence that could come from progress on the trade front.

Beijing's soft touch response to the tariffs may have been part of a bigger plan to hand Trump an election win in the Fall. The GOP is soft on Chinese human rights issues, making them preferable to the ethically strident Dems. They have lots of wiggle room to compromise on trade.

I'm cashed up, waiting patiently for the corrective rotation to play out a bit further. The Risk Model has yet to reverse and give the green light. The copper/gold ratio (below) needs to breakout of a much needed confirming signal. Repositioning of portfolios is often held up by quarter end 'window dressing' so next week's tape could look quite different.

All things considered, it might be wise to keep your head down this long weekend. Chicken Little might have been right after all.

Risk Model: 2/5 - Risk Off

The Copper/Gold ratio (below) is deeply oversold on the back of the trade rhetoric but is in a negative state. The VIX stayed negative as well for the week and needs a period of stability to turn bullish (below the 50 dma).

Copper/Gold Ratio

AAII is a lagging indicator and has whipsawed violently with the headlines. Having crossed the signal line 5 times in the last 3 months, it is now in risk off position.

The credibility of of last Friday's low as the 'retest' low was enhanced by the position of the MACD momentum indicator (see below). Having failed to expand to a lower level is textbook confirmation action.

S&P 500 Double Bottom

A wide trading range has now developed. This calls into question the validity of my "second quarter top" scenario. This 2009-???? bull market has proceeded at a leisurely, almost glacial pace. The prerequisites of a top are not yet in place. Credit stress is muted. The inverted curve is being forestalled by the dovish tilt to the Fed mindset.

Valuations are now comfortable, having been simultaneously repaired by the tax-enhanced earnings upgrades, and the market's speed bump correction over the last two months. It's now-or-never for the lagging sectors to show up to the bull market party.

But remember, being 'right, but early' is the same thing as being 'wrong'.