Outside Day

Old man winter, just like the scandal plagued Liberal Government, is still hanging on for dear life. We all know it's almost over, but the last few days have been brutal for most residents of the north. Sunny ways are a distant memory now.

So, not a great day to be outside.

The stock market action yesterday was also not great. Last week's cresting market momentum turned downright ugly on Monday with an abrupt reversal pattern in U.S. stocks. The over-bought stock market, having already baked-in a trade deal, was ripe for a pause. Yesterday's action was confirmation, producing an "outside day" in the charts.

Outside days are produced when stocks open higher than the previous day and subsequently close lower (below). They usually mark important inflection points.

S&P 500 - Daily, 1 Month

Yesterday was just such a pattern. But as any technician worth her salt would know, it doesn't always produce a major sell-off. The preexisting fundamental conditions are just as important.

To that end, stimulus from the various policy moves made recently are critical. Just as the FED's change to 'patience' removed the tail risk of a recession, the truce that would come from a U.S. - China trade agreement should be sufficient to keep markets from revisiting last year's lows. December's worst fears of a recession are likely over for now.

And there are other 'green shoots' too.

The European PMI measures recently reported have been sequentially stronger. Eurozone stability is likely to be enhanced by a soft Brexit that is currently being muddled through. Most importantly, China's fiscal stimulus is now in full swing. This morning's announcement of a VAT reduction, combined with expanded local government borrowing authority is being reflected by rising markets in Shanghai.

Combined with the PBOC monetary easing implemented last month, China's growth pattern should stabilize this year. The asset reflation currently underway in their stock market is confirming that growth expectations have reversed to the upside.

Last year's tightening of financial conditions was much needed house-cleaning for the debt laden Chinese economy. Premier Xi needs to have a 'good news' economy to celebrate the 70th anniversary of the regime slated for this coming October. It'll be 'warp factor 10' policymaking til then.

Importantly, global economic surprises have started to bottom out (below). The widely discussed global growth deceleration has now been universally accepted and is 'baked in' to the numbers. A reversal is now likely. Cue the Q2 upward revisions.

Citi Economic Surprise Global Indicators

And before we get all worked up about yesterday's piss-poor tape action, consider that the majority of the cash that was built up late last year has yet to be re-deployed. Downside will be limited. A choppy sideways tape is likely to frustrate bears for at least a while longer.

Stay with the primary trend for now and use this weakness and be a stock picker. A self full-filling 'sell-on-news' pull-back is not to be feared but to be embraced. As Target's beat and 5% rally this morning shows, this is a market of stocks, as opposed to a highly correlated stock market. Anticipate the anticipations of others, who will likely chase the next "good news" rally.

Spring will soon be here. Outside is now the place to be.

Risk Model: 4/5 - Risk On

AAII Sentiment is a bit ahead of itself, which for contrarians is a bit unnerving. Last week saw a move to a ratio slightly over 2:1. A pause in markets should help bring that down when the new data is revealed on Thursday.

AAII Bull/Bear Ratio

Copper/Gold is similarly stretched and a consolidation would be healthy. I'll be buying the dips in copper. It has excellent long term potential from the extension of the cycle that is currently developing. With a structural supply deficit and low levels of speculative positioning, copper stocks are my favourite 'beta-up' plays.

Copper/Gold Ratio