Squeeze Play
In baseball there is no play quite as exciting as the suicide squeeze. A runner on third is given the steal sign, and in a do-or-die effort, hurtles towards a stationary catcher at the plate. This is as close to hockey as the relatively gentile sport of baseball gets. Like a defenseman in the corner getting slammed by a power forward, a collision is unavoidable.
Bones are broken in the mayhem of a forced meeting of two determined bodies. Collateral damage is substantial. Time out is called.
Current U.S. monetary policy has set up just such an event. Chair Powell has just given the 'steal' sign to short rates. In his mind, there is no deviation from the path to the 'plate' of normalization. A stationary ten year yield, stuck stubbornly at 3% like a terrified catcher, awaits the 2YR 'runner'.
Collateral damage to asset and currency markets will result. All that remains is for the Fed to make its move in September.
Fed governor Bullard is openly warning of trouble should the yield curve flatten further and invert.
Here's the play-by-play:
Market corrects hard on the realization of an inevitable inversion. This would force the Fed to reluctantly reconsider their rate hike guidance and revise the dot plot consensus.
A pause in tightening will then ensue, allowing for a recovery rally and the next leg of the bull.
Meanwhile, market strategists and their sycophants - commentators like Jim Cramer- continue to cheerlead the S&P to new highs, all the while driving in the rearview mirror of second quarter earnings. and U.S. centric GDP stats. There is a complacency developing about the future path of stock prices. Vix readings are at six month lows.
The current global slowdown is not even a top headline. There is no room on the front page after the tiresome articles speculating of whose next to join the irrelevant $1 Trillion club.
European GDP is slowing, reflecting political uncertainties, - Turkey's in free-fall and a hard Brexit looks increasingly possible.
Emerging Markets? Yawn!
Europe Economic Surprise vs U.S.
Dr Copper has been signalling a global slowdown lately, but U.S. investors have yet to heed its message. The huge pro-cyclical effects of tax reform are masking any imported weakness in the U.S. Forget housing and autos are weak, the Netflix numbers look great!
Chinese lending curbs instituted earlier this year, combined with retaliatory tariffs have created a bear market for risk assets in China. I discussed this possibility in my Oct 2017 piece, "Xi Whizz" as China risked taking some austerity pain following Xi's elevation to leader for life.
Nailed it.
Today's classic "Tuesday at 11" rally in Shanghai is a possible turning point. The PBOC has warned their banks not to engage in "herd behaviour" on the Yuan. They are signalling to the market that the currency devaluation has reached a level that they are comfortable with. The recent relaxation of lending controls, combined with increased fiscal stimulus announcements is a further sign that Chinese stock market weakness may have run its course. The Beijing moral suasion usually works with a lag so I wouldn't jump the gun just yet. But, unlike the 2015 slowdown, this mid course correction looks to have bottomed.
This sets up today's over-sold rally in China and the emerging markets. I am waiting for a signal from the Copper market before jumping in but its reaction so far has been tepid. It is tempting to bottom fish the EEM, but I'm still saying "show me".
In the U.S., a navel-gazing consensus around growth stocks is masking wider deterioration in the market. Yes Amazon is a great company, but when this year's tax gift turns into tommorow's debt hangover and consumers pull in their horns, (as they have already done in autos and housing), even free shipping won't help to create a Bezos earnings beat. Last week's tepid reaction to AMZN's monster quarter is a telling comment on the market's condition.
Volume non-confirmation of price is now rampant. The shit-Facebook earnings showed how vulnerable a growth stock is when volume and price diverge. Check out the chart below. I use the cumulative volume indicator (CMF) to verify price action. The top panel shows the CMF which failed to make a new high, thereby giving a 'non-con' sell signal. And there are plenty more charts just like FB in the Nasdaq.
Facebook: CMF Volume Measure Non-con
And was last week's rotation away from tech saved by Apple?
Surely America's most popular company will save the day.
But even a strong earnings report has failed to draw in enough volume to confirm the new high (see below). It seems that their buyback was the entire bid over this last run. The retail AAII players- the home gamers - are still selling.
Until now, the U.S. trade spat with China has centered on industry wide tariffs. Given that China has fewer American imports to tax, China will most likely use the threat of stock specific sanctions in the escalating trade war. Last week they denied approval of Qualcom-NXP.
Could curbs on iPhone sales in China be next? That would quickly bring the trade issue to a head.
Over to you Apple bulls.
Apple: Volume Fails to Confirm
In fact, the entire Nasdaq market has given such a signal, as evidenced by the QQQ ETF chart below.
NASDAQ ETF: CMF Volume Non-con
The market is starving for volume confirmation. Unless there is an injection of fresh buying, or more importantly a lasting rotation to Value from Growth, further correction is inevitable. A catalyst in the form of a Fed policy error in tightening is shaping up for this Fall - and it could be a doozy.
The percent of stocks making a new 52 week high today is currently 4%. Really? At the last high in January it was 40% plus.
Sell the new highs here.
The essence of Tues@11 always comes back to expecting the expectations of others. To that end, we must try to position our portfolios where the puck is going to be, not where it currently rests. This Gretzkian adage is particularly timely after a strong first half market performance.
So I expect the September squeeze play in rates
to create a reaction in markets that presents an golden buying opportunity.
Once the sugar high of strong Q2 earnings fades, it will be time to put on some new late summer 'shorts'.
Risk Model: 3/5 - Risk On
The risk model has had it right this month, at least where the U.S. market is concerned. All this despite the lack of participation by the public. The AAII Bull/Bear ratio remains negative, while Bond ETF flows are positive, and Stock ETF flows are negative. Meanwhile, the market is chugging ahead on the Q2 good news. With no reaction to the negative news flow on trade, the globalization deniers ( read: Cramer) are in full ascendancy.
Other troubling issues remain. Jim Bianco of his eponymous research firm says that the S&P is composed of 9 transformational companies and 491 Piñatas waiting to be disrupted. No wonder market breadth is poor. This helps explain the breakdown in the inflation expectation link to the currently roaring economy. Disruption equals deflation. The FED is populated by governors whose Phd work was informed by the Volker era inflation fight. Their thinking is coloured by that era.
Of such things are policy errors made.
Meanwhile, the S&P continues to calmly make new highs. When you feed a baby enough pablum (tax cuts) it stops crying (vix).