Suspended Animation

Investors have been stuck in neutral recently pondering the results of the final push in the U.S. China trade negotiation saga. Markets are in suspended animation, pausing at the 200 DMA. With the 9% rally since December, the S&P 500 has partially priced in a successful outcome and a final push to the upside is likely if a deal is proclaimed. But is the bullish market move the pause that refreshes or the end of the dead-cat bounce that leads to a retest?

If it was up to my tactical model, I would be long. AAII Sentiment soared last week as trade talk confidence grew, keeping the model in 'buy' mode. But as I have always said, any short-term model is useless if the major trend changes. I believe the jury is still out as to the major trend direction unless two things confirm.

The Copper/Gold ratio similarly needs to break its recent downtrend to confirm a reversal and the U.S. Treasury Yield Curve, although not inverted, needs to steepen.

The charts below are not encouraging. There was no volume confirmation of the recent rally in the S&P - the Chaikin Volume Indicator that helped alert me to trouble last year, is weak. More importantly, there has been no steepening of the yield curve, and gold continues to outperform copper as it has for over a year.

SPY : Chaikin Indicator & Price

Copper/Gold Ratio

U.S. Treasury Curve : 10YR-2YR

Last week, I outlined a case for a seasonal rally in copper. Unfortunately that rally cannot occur until the uncertainties that surround the global growth backdrop are dealt with. Both Europe and China have been a drag on growth prospects for months now. China may recover from a combination of stimulus and a resolution of the trade issues, dragging Europe with it, but that is still to be seen. I'm not there on the copper trade just yet.

Now that the monetary threat has been neutered by Fed Chair Powell's back-off, risk markets have stabilized. However, the better performance of Growth over Value since the Christmas Eve bottom indicates that the rotation to cyclicals, that I continue to believe is necessary for a lasting extension to the bull market, has yet to occur. The FOMO crowd is back chasing the Momentum trade.

Growth/Value ETF Ratio

There is a lack of conviction from both the bull and bear camps and cash has built to extreme levels. After the October-December correction, cashed-up investors are now keen to get bullish on any good news. We saw that last week with the huge reversal in AAII sentiment. But this indicator has actually been a better contrary measure in the short term, leading me to become more cautious.

AAII Sentiment

I'm sorry to be the bearer of bad news, but I don't see a fat pitch here, either bullish or bearish. Macro trading has become a binary game, held hostage to the confidence swings that come from decisions made by the increasingly arbitrary and hostile clash between policymakers, both domestic and global.

Just removing the threat of a hawkish FED has been enough to push markets back to a 17 p.e., hardly a bargain but not expensive either. Last year, an intransigent FED, operating in a U.S. centric data world, was the biggest threat to the economy and markets. In the December stock collapse, a major lesson was learned by the FED and Powell backed off smartly. The FED's tightening threat has been replaced by fears of disfunction at the global fiscal policy level. Good luck handicapping that one.

And the likely potential of a 'kick the can' deal with China is sure to be a 'lunchbag letdown' for the cyclical players like myself. It won't signal an upturn in economic growth that is necessary for an extension of the bull market. It may be enough to push the Growth stocks upward temporarily but I can't get too excited chasing expensive momentum plays.

I'm in suspended animation mode I guess. Wake me up when this is over.

Risk Model: 3/5 - Risk On

The collapse in volatility and a bounce in sentiment has pushed the model into risk-on mode. The AAII sentiment indicator could turn down sharply on a disappointing outcome in the trade talks, with a coincident spike in volatility. Not the best set-up to be risking a lot here, given the coin-toss nature of the talks. Pass.