Bad Posture

As he did with the NAFTA last year, President Twitter has thrown a curve ball deep in the count. Just when the trade talks looked like they were in the bottom of the ninth, Mr. 'Art of the Deal' put the Chinese on notice that he was not happy about the perceived backtracking by Chinese negotiators.

The posturing from Trump is textbook.

But the muted market response yesterday shows how FOMO-complacent the market had become. If this was 2017, the S&P would have dropped 5% and stayed there. Yesterday's low was on the open, a sign that the weakness was bought. Investors have been trained to buy the dip at all costs. I'm not so sure that is healthy but I'm also not surprised.

Remember, our job is to anticipate the anticipations of others. In that regard, the UBS survey just released is instructive. While a majority of the clients surveyed were bullish, they are also sitting on a cash position of 23%. Having sat out the first quarter rally, they are itching to get in. Trump's tweets, and the negative market reactions they create are just what they have been waiting for. No wonder this market can't correct.

I have been waiting for the signs of a successful re-acceleration of global growth to get more involved in the markets. Although my risk model has been correctly bullish for weeks now, the stale leadership of the bond-like equites, staples, utilities and growth stocks has given me an uneasy feeling about the market.

The FED policy pivot has dominated investor behavior recently. Repeat after me ... "there is no alternative", when ten year yields are below inflation expectations. The force-fed risk appetite of investors is most evident in the reach for fixed income yields. Yesterday, amid the panic, junk bonds actually closed up on the day. It seems all it takes for investors to gleefully chase over-leveraged, Swiss cheese covenant corporate debt is a mere 100 bips.

It is often said that fixed income markets 'know' more than equities. I'm not so sure now that the central banks are in control of a large portion of them. Don't look for the usual 'canary in the coal mine' signal from junk bonds this cycle. They are just equities in drag.

But financial stability, the unspoken third mandate of the U.S. Federal Reserve, has been relegated to the back pages of the financial press. The massive build-up of non-financial debt in the system, although not stressful from a carrying cost perspective, will be a serious problem should either global growth slow-down morph into a full-on recession or, god forbid, growth re-accelerates sufficiently to cause an inflationary scare.

Recent calls from both financial futures markets and the White House for lower rates have been a Siren song for investors, leading to a persistent lack of selling pressure. How we got from a hostile FED that was "far from neutral" in October, to a Fed futures market that has a 90% chance of a cut by January is a mystery to me. And how does one square the recent record employment levels with a plea for lower rates from the intellectually bankrupt Trump administration? Oh, yah, 2020 election ... I forgot.

The truth is possibly in the middle, but the bull case for stocks in the lower for longer rates is hard to dismiss.

As to the tariff issue, I go back to what I said last year. The Chinese may have more to lose, but they enjoy a much longer runway. They can wait out Trump as long as the switch to a domestic/consumer economy proceeds. The bait and switch that they attempted to pull shows that. But Mnuchin and Lighthizer called their bluff and now the fight is back on.

So yesterday's sanguine market reaction is vulnerable to downside should trade tensions escalate. The commodity markets are now on the back foot, with last week's serious break in the copper market. Agricultural markets are in disarray and emerging market equities have broken down.

Meanwhile in U.S. equities the complacency is so thick you can cut it with a knife. A dull one at that. Even Buffet has allowed the new minions in charge to buy Amazon. Could this be a sign of the top for growth?

This morning's second sober thought, repositioning lower in case of a negative outcome, is healthy. Last week, I talked about the huge long position that had built up in the short-vol trade. There is a possibility of a blow-out of bad positions this morning that I hope doesn't get out of control. I'm watching VIX today. It isn't starting well.

As for equity markets and the pollyanna bulls, Trump's gambit may not amount to posturing after all. The black swan we have collectively forgotten about may actually be orange.

Risk Model: 3/5 - Risk On

The AAII sentiment measure is elevated. We will see how brave investors are in the face of this glitch in the trade deal in Thursday's release.

The Copper/Gold signal got it right last week by breaking hard below the 50 dma. I sold stocks on that signal last week as the widespread weakness that developed in commodities spooked me.

The VXV has jumped again today. That indicator has got my attention big-time. It will signal a sell on a close above 18. So far this morning it looks bad. The model is late again but that isn't surprising. At least the RSI will go positive today. So much for an over-bought condition.

The inversion of the bond markets from a 3 month - 5 year perspective is also troubling, having deteriorated over the past two weeks. I would like to have seen the market re-steepen over the last month. The trade uncertainties will prevent that for now.

Sell in May and go away? Just last week, we had a trade deal priced into the market, volatility was cheap and the IPO market mania was rampant. Even Buffet bought AMZN.

And now we're relying on a guy with an itchy twitter finger to put things right.

Cash is looking better every day.