False Positive

Whether from China, Europe, or domestically, there is much to be negative about. Leading economic indicators have rolled over. Confidence surveys have dipped. Housing is bad. The market sell-off in December prompted a the lowest sentiment reading in three years. So why is the market now drifting sideways?

Tomorrow we should hear why.

Jerome Powell (the Chairman of the only central bank that matters) will be forced to submit himself to a monthly grilling from financial journalists, and they are smelling blood. After a series of gaffes last fall that sent the markets into paroxysms of selling, the now chastened Powell seems to have learned his lesson. But that won't stop reporters, and more importantly anchor desk talking heads, from dissecting his every utterance with withering exactitude. The message has sunk in; Powell will stick to his script or risk instant pain from the news-reading algos. The Fed's autopilot has been switched off.

So absent a screw-up by the rookie rate-setter this week, the market will have what it needs to keep from revisiting last month's lows. But he must 'come to play' this week. If his new favourite word "patience" isn't front and centre at tomorrow's 2pm news conference - watch out below! I'm betting it will be used unsparingly.

But unlike the current consensus, this doesn't make me bullish either.

The Nvidia, Caterpillar and Apple earnings woes accurately reflect the deceleration of the global economy that many U.S. market bulls ignored last year. Accentuated by the cost increases from Trump's tariffs, and squeezed by the volume effects of slowing global demand, the profit misses were inevitable. Analysts are now sheepishly reacting by belatedly cutting estimates.

So the key driver of market direction- namely earnings revision- is heading south. (Just like me ... Florida by Saturday!) At this rate, 2019 earnings could be flat at $160 for the S&P.

Poor corporate reports are starting to pick up speed, and negative guidance is also starting to pile up. So far, the earnings tape bombs have been seen as idiosyncratic and not indicative of general weakness. But given this backdrop of deceleration, there isn't much to look forward to, given the waning sugar high from tax reform.

Now add a new threat, as the U.S. - China geopolitical soap opera evolves. Huawei, the trojan horse backed by the Chinese Communist Party, is the new bete noir of the alt-right. The Department of Justice is leading the battle against intellectual property theft with the latest Huawei charges.The U.S. President, is cheerleading this effort, as it provides him a convenient distraction from his losing battle for a Mexican wall.

Cramer just said "if we get a trade deal with China, you'll be paying $150 for Cat" Quick and robust trade deal with China? Fat chance, given the Huawei issue. It's this type of pollyanna thinking that needs to be wrung out from the market.

Apparently, FOMO has come back for an encore. Isn't that what got the market into trouble last year?

Although the stocks are showing a reluctance to revisit last month's lows, the risks of a pullback that accurately reflects the deterioration in the earnings outlook is growing. Investors seem to believe the FED will be on hold permanently, yet, somehow, the economy will magically rebound because of a grand solution to the trade issue. As I have argued previously, solving the trade issue won't help unless the Chinese domestic economy definitively bottoms out and reaccelerates. It's the global economy, stupid.

The recent out-performance of foreign markets is an encouraging sign. Chinese efforts to stimulate have been multiplying recently. But more bad news on the U.S. side seem inevitable. There is never just one cockroach.

At 2350, the S&P 500 priced in all these negatives. At 2650, I'm not so sure. The S&P has recovered 50% of the recent decline but is now at a major resistance line. (chart below).

When it comes to the market, there seems to be a few too many false positives for me to get involved. Like Powell, my new favourite word is patience.

S&P 500 - 6 Month Chart

Risk Model: 3/5 - Risk On

A mechanical buy signal has been given by the model, but I'm reluctant to follow. The 3 Month VIX and AAII Bull/Bear are barely positive and vulnerable to any perceived bad news, and the 200 dma signal is at resistance.

Along with the over-bought RSI, the Copper/Gold variable is still on a sell. This accurately reflects the market's collective judgement regarding the state of the global economy, combined with a residual fear factor about geopolitical/economic risk.

Gold is forming a huge base, as the negative effects of the strong dollar wane. Tax reform, and the attendant economic spurt, are a spent force. Central banks all over the globe have begun to tilt dovishly. Bitcoin is now as popular as Pet Rocks. Bad news is good news - for gold bugs (chart below). I'm long.

Next month begins a seasonally strong period for copper. A stronger post-Chinese New Year economic environment is critical for that play to work this year. I wanna like copper, but lets wait for a signal. Stay tuned.

GOLD

HOG TIED

Enviro-sensitive Millennials are unlikely to be trading in their scooters for Harleys despite the fantasy scenario of increased ridership touted by CEO Matt Levatich. Trump's support for the company came with strings attached - higher wage and steel costs and they moved production to Thailand.

More importantly, the core market will dwindle sharply over the next few years as aging Baby Boomers, will increasingly be unable to lift their legs high enough to get on the product. It's a value trap.

I'm Short!

HARLEY DAVIDSON