Brinksmanship On The Hill


Equity markets continued their rebound last week pushing their bullish streak to 3 weeks in a row.

U.S. stocks were up almost +3% for the week, and cleared their 50-day moving averages on excellent volume.

This price action is bullish, but we’ve also got our eyes on the major overhead supply of stock which comes in about 3-5% above current prices.

Additionally, our Alpha Rotation models also issued buy alerts for the all three of the U.S. stock indexes they follow this week. This is a strong indication that significant bullish conditions are in place.

The Alpha Rotation models have impressive track records at predicting the major U.S. equity market trends which include exiting stocks before the late 2018 plunge, and buying bonds at about the same time when the prevailing wisdom on interest rates was incorrectly bearish.

Meanwhile, Mr. Market seems unphased by the Schitt show on Capitol Hill. The vitriol continues to ratchet up with no end in sight, despite the fact that it’s led to the longest government shutdown ever.

If this continues, the rating agencies warn that another US debt downgrade is in the cards.

All this is occurring while we are “floating on a sea of debt” (Jeff Gundlach CEO of Doubleline) which will hit record levels for 2019 after the recent tax cuts.

Another downgrade is not something that the markets could dismiss easily as this would be the second downgrade since 2011.

A debt downgrade will increase our borrowing costs and could threaten the dollar as the reserve currency which is already under attack.

So, if the market awakes one morning to yet another downgrade, forget about looking at past data as there is none regarding the US. It’s virgin territory. Lock the door behind you and head for the nearest fallout shelter.

In the interim, this week’s takeaways are:

  • Risk Gauges are all positive and improving
  • Gold (GLD) which held up well despite the rally finally retreated Friday and relenting to bullish equities
  • High yield and Corporate Debt have found buyers which is bullish
  • Emerging Markets (EEM) confirmed its breakout above key moving averages
  • Speculative sectors such as Biotech (IBB) and Semis (SMH) are leading the bounce
  • Market Internals are very overbought short term
  • Sentiment (VXX) has calmed down but still needs to break below its 200 DMA to fully recover from its recent bought of anxiety
  • Volume this week finally turned positive confirming price move up
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