Poke the Dragon

With any hope of a quick reversal of the trade war now lost, - a real Game of Thrones: Xi vs T- is playing out over the next few episodes. The Huawei proxy war is a dangerous escalation in tactics. Poking the dragon is not a confidence booster for investors. Welcome to my nightmare fellow traders. Try to trade this market, I dare you.

Remember, not all volatility is to the downside, as this morning demonstrates. Any faint whiff of a concession by either party, however spurious, is met with short covering and bottom-fishing responses. But relax bulls, all that is accomplished by a 90 day stay of execution for Huawei is a couple of last minute software upgrades in the rural internet that the Chinese trojan-horse gear maker dominates. Bubba and Skeeter have will have three months left to switch to Verizon.

A war of words is much easier to wage than the actual type. You know, the one with guns and all. Both parties in the dispute, motivated by a battle for the high ground, will lob and volley back and forth until a breaking point. How long it lasts is highly uncertain.

And as we all know, uncertainty is the bane of any investors existence.

The past week saw a reading of AAII sentiment that was an abrupt reversal of the pollyanna feel good of two weeks prior. The first four months of optimism was wiped out entirely by one bad week in the market.

I spoke about this complacency last week a wondered aloud about its durability. Now we know investors have taken notice that something has changed.

AAII Sentiment: Bull/Bear Ratio

The real problem is not yet evident in the U.S. market, masked by mega-cap growth favourites that dominate the indexes. The Korean equity market is a much better read on global growth -and it ain't a pretty read. The failure of this proxy for a successful reflation of economic momentum is disturbing to say the least.

Korean Stock Index

Domestically, North America is in better shape than most, largely driven by a dominant service based economy that is still growing. There has been much debate regarding the potential of a recession since last year's interest rate hike campaign by the FED.

The nature of the economy has changed sufficiently to call into question the reliability of using traditional data for that purpose. If the U.S. economy is doing so well, (using the employment data for a read), why do the trucking stocks act like this.

DJ U.S. Trucking Index

Notice the top panel that shows the relative strength of the index to the broader S&P 500. It peaked out 18 months ago. Ominously the momentum break-down (bottom panel) is occurring after the falling 200 dma repelled an attempt to regain old highs. If transports aren't confirming, the venerable Dow Theory sell signal is triggered. The top is in for the real economy.

I was alerted to the weakness in trucking industry by a friend who is close to the business.

In his words...

"It has long been held that trucking is a lead indicator of economic fortunes so it was interesting to recently review the CASS Freight Index (US) where volume has dropped precipitously over the last 9 months in both trucking and rail shipments (-8%). BNSF reported a 5% decline in volumes while Yellow reported overall decreases of 4.1%"

Not comforting news with all the international uncertainties affecting confidence.

The front end of the yield curve seems to have it right. There is a 20 basis point dip between three month and the 3 year note. That says recession fears are not going away quietly.

The Professor Yield Curve and Dr Copper are now singing the same tune now and I'm not gonna ignore those two guys, given their track records.

If Trump wants to nominate them to the FOMC board I'm all for it. But since they can't donate to his campaign PAC, I'm not holding my breath.

Be prepared for a large scaly thing that breaths fire to ruin your portfolio returns for a while longer.

Risk Model: 3/5 -Risk On

A dramatic drop in sentiment was offset by an equally sharp drop in implied volatility and a removal of the RSI oversold condition. It remains to be seen if this status change in the model after a sell signal can be sustained. As I said, this environment can whip-saw traders in a heartbeat based on just one tweet. I'm just not interested in this market until I see a broadening out of economic performance to confirm a durable expansion.