Pause Button

The 'don't blink you'll miss it' rally is at risk of running out of steam. What started as a dead cat bounce, surprisingly morphed into a playable recovery from the dry-heave lows set in December. This is probably the most compelling evidence that stock prices are primarily a monetary phenomenon. The FED about-face, widely unexpected by most market watchers (me included), has now propelled stocks into over-bought territory. Such "V" shaped bounces in risk markets without a subsequent re-test, while rare, are not unheard of. But is a re-test now off the table?

Looking at the S&P 500 off the low (chart below), we see this as a natural point to pause. But how do markets proceed from here?

S&P 500

Powell & Company may have righted the ship by calling a 'time-out' for further rate hikes. But the data now crossing the tape are shut-down induced noise and no help in determining the real health of the economy. And the mixed earnings reports being delivered have only served to confuse the issue. The recovery in investor sentiment is complete, as evidenced from survey data (below). People are optimistic about the next six months. But are they actually buying?

AAII Bull/Bear

Fund flows, including ETFs, are usually seasonally strongest at the beginning of the year. The data reported so far this year are not encouraging on that front. According to Morningstar, reported flows for January are downright dismal. Investors, after extracting $87Bn from funds in the December panic, invested a paltry $39Bn in January, as compared to $132Bn in 2018. And most of it was dedicated to bonds. Pathetic.

Money flow data in the widely held SPY index fund was similarly weak. From the chart below, and using the Chaikin Indicator (upper panel) to deduce the plurality of positive volume flows as a guide, the validity of of this move off the lows is highly questionable. It is this indicator that correctly flagged last year's trouble. Talk about 'show me the money"! I suppose the market threw a party and nobody came.

SPY ETF

Most active managers have held too much cash and therefore are lagging the rally. After being so shocked by the December melt-down, they came into the year cashed up and bearish. Negative cheerleaders and perma-bears like Rosenburg, Gundlach and Tice were quoted widley, fanning the flames of caution. The contrarian in me had a field day, buying liberally. But nobody I know called the magnitude of this bounce. If you know someone, send me his blog so I can retire - again.

There is now plenty of unrisked cash to fuel the next up-move in markets, after a short time-out to catch our collective breaths. The glass is now half full.

Today Fed Chairman Powell is taking great care to say many words that mean nothing. He can't afford to undo the hard-won confidence he engendered in December's capitulatory reversal. He is a non-entity for now.

The China-U.S. trade issue is all but signed, if you take President Cheeto at his word. This week, he meets with North Korean leader Kim Jong-Un, fresh off his journey to Hanoi on the commie 'Peace Train'. Trump's short attention span is now firmly focussed on getting that Nobel Peace prize and the China trade issue is now getting stale. A 'done-deal' with China is now inevitable, as he turns to face a 2020 election run. It'll be HUUUGE!

My attention has shifted from U.S. markets to the cyclical stirrings from the copper market. As confirmed by a huge rally in Chinese domestic stocks, the copper market is on a bit of a short term seasonal run here. I've enjoyed the rally but it is already running into resistance, especially when measured against Gold (below). The falling moving average of this indicator, negative since Q1 2018, will take more than a bounce to convincingly turn to positive. But this is a good start.

Copper/Gold Ratio

China stocks (below), courtesy the ten-to-one margin leverage offered by stock brokers in that loosely regulated market, have quickly responded to the re-stimulation offered by a government in the form of bank reserve loosening. A can of financial caffeine (Red-China Bull?) as it were. It has elevated stock prices. This is the time-honored game of asset inflation policy-easing. But will it work?

FXI ETF - China Large Caps

The command-and-control policy framework in China is a powerful opponent for any bearish argument. We hear "they have too much debt" - "the demographics are weak" and "the export driven economy is vulnerable to global slowing". All true, but do you want to bet against them?

With consumer credit availability now easing, combined with a massive infrastructure initiative and a new trade deal, the animal spirits of China are being assembled like warriors in a Fornite game. I'm still betting they win. When Chinese investors and consumers are given easy money, they buy with impunity. Xi needs a win just like Trump.

So after a short, sharp pause that refreshes in risk markets, I believe the next up-move will validate the bullish case of a soft landing. The monetary relaxation/pauses that have just occurred are an important pre-condition for the resumption of the global cycle. Necessary, but not sufficient.

Fiscal policy, especially in the moribund Eurozone needs to do its part. Brexit stresses are at their 'max-pain' levels now and will abate shortly, allowing investment spending to expand. Europe needs to join the party so a post-election fiscal package from Germany would also help.

All these elements can coalesce into a positive outcome for equities over the next few months. Sounds a bit too pollyanna?

Maybe, but we can now be patient given the market has hit 'pause'.

Risk Model : 4/5 - Risk On

The overbought condition is the only negative indicator for markets after the Powell power-move rally.

Too many investors 'missed' the rally for a major pull-back to logically occur. Any profits here should be protected or harvested, as the self-fulfilling prophesy of a 'sell on news' set-back is likely now starting to develop. Patience is a hard trait for a trader like me to develop, but a man can change, if I have to, I guess.