Whistling Past the Graveyard

After last week's hawkish Fed kept the U.S. dollar rally going, one can be excused for thinking the bull market is intact.

Despite the lack of volume confirmation evidence I presented last week, some parts of the market have kept rallying. Fang stocks, as well as Small-Caps have taken over the job from Large Cap multi-nationals in a effort to keep the party going. The FOMO effect is especially strong at this point on the calendar. Nobody wants to call an end to the stock party just yet.

Are investors just whistling past the graveyard?

That expression is now seldom heard, given the modern preference for cremation and ash scattering, but it expresses my view of the market perfectly.

As the expression implies, when presented with an imminent threat, just go into denial mode and keep cheerful.

However now the threats are coming fast and furious now given Trump's peripatetic economic policy circus . He keeps strapping more ammo to his trade-war suicide vest every day and the U.S. talking heads keep saying it's a negotiating tactic. I'm not so sure. This latest salvo may have pushed them over the edge. But the U.S. investor base's predilection for navel gazing has kept them from caring about anywhere but home base. Hence the out-performance of domestic oriented Small Caps.

But regardless, I'm not basing my bearish stance on trade but on monetary conditions. The FED is the ultimate referee in this game and the market has already received a yellow card in the form of monetary tightening and the consequent U.S. dollar strength. When they play the red card, the one that inverts the curve, the economy will be banished to the sidelines. Given how sticky to the upside the long end of the curve is acting, that inversion could come sooner than later.

Meantime the beat goes on. Growth is hammering Value. Small Cap, a lagging indicator to the economic party, has taken flight. The Johnny-come-lately buying is chasing the momentum trade. But a light volume drift-up like this doesn't inspire me to commit cash to a stretched market.

In two weeks, things will look quite different as the quarter-end performance pressure is relieved. Just as it did in January, the new quarter will reveal who is swimming naked, as I pointed out last week. The picture won't be pretty.

For me, the short side is now more attractive and risk-off protection strategies have merit. A correction seems nearer given the deterioration in the last week. "U.S. First" is likely be "U.S. Last" - to correct.

Risk Model: 4/5 Risk On

The model is bullish despite my nervousness and that conundrum is troubling. All the fundamental positives are well known... Strong earnings growth, low real yields, still positive yield curve, high equity risk premium, are still there. It's just that I would like to see a healthy correction and a more normal rotational leadership change that can put the market on a path to a healthier advance. That may come, but I'm waiting now.

Dr Copper is getting hammered, further delaying that rotation. That single indicator is the one I have on my radar. It doesn't act well as the strike-fear rally fades and trade war talk dominates the direction.

As well, I'm watching gold for a tell on when the U.S. dollar rally has peaked. Look for a September seasonal trade to develop, but it's early yet. Oil may find a fresh bout of selling in the post-OPEC trade next week as the focus will shift to rising U.S. domestic production data. I'm still bearish oil.

I guess its off to the golf course for me!