Bulls Regain The Narrative As They Want To Believe

Last week, we laid out six points about the market as the risk to the downside outweighed the potential reward. 

  1. Historically, September is one of the weakest months of the year, particularly when it follows a weak August.
  2. The market remains range bound and failed at both the 50-dma and downtrend line on Friday
  3. The oversold condition has now reversed. (Top panel)
  4. Volatility is continuing to remain elevated.
  5. Important downside support moves up to 2875
  6. The bulls regain control of the narrative on a breakout above 2945. 

The chart above is updated through Friday’s close. As noted, the bulls did regain control of the narrative for now as the breakout above consolidation sets the market up to rally towards 3000 and the July highs. However, with the markets already pushing back into overbought conditions, in conjunction with an extended buy signal, there is not a lot of “upside” in the markets currently. 

As we have reiterated over the last several weeks, this continues to be an opportunity to reduce portfolio risk and raise cash levels.

I say this because it took a bevy of positive overtones to reverse the selloff early in the week. After a sloppy Monday and Tuesday, the rally started on Wednesday with numerous Fed speakers all suggesting the Fed was likely to move forward with cutting rates and increasing monetary accommodation. (H/T Zerohedge)

Williams (Dovish)“Ready to act as appropriate”, July cut was right move, economy mixed (admitted consumer spending not a leading indicator), international news matters, low inflation biggest problem.

Kaplan (Dovish): “Monetary policy a potent force”, worried about yield curve inversion, economy mixed (factories weak due to trade, consumer strong), watching for “psychological effects” on consumers, “if you wait for consumer weakness, it might be too late.”

Kashkari (Dovish): Tariffs, “trade war are really concerning business”, job market not overheating, slower global growth will impact US, most concerned about inverted yield curve. Fed’s policy is “moderately contractionary.”

Bullard/Bowman (Looked Dovish)Took part in “Fed Listens” conference but made no comment on policy but then again when has Jim Bullard ever not been dovish.

Beige Book (Mixed)Moderate expansion but trade fears are mounting, but optimism remains, despite what Kashkari says: “although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook”

Evans (Dovish)Trade policy increases uncertainty and immigration restrictions lower trend growth to 1.5%, Auto industry especially challenged

Furthermore, on Tuesday, we suggested it wouldn’t be long before the Trump Administration dropped an announcement for “trade deal negotiation.” 

Of course, on Thursday, our wish was granted as the Administration announced that “trade talks” were back on for October. 

“China’s Ministry of Commerce said Thursday that the leaders of the U.S. and Chinese trade talks held a phone call in the morning and agreed to meet in early October for another round of negotiations. 

In a statement to CNBC, a U.S. Trade Representative spokesperson confirmed the phone call, but not the October meeting.

Beijing said the two sides agreed to hold another round of trade negotiations in Washington, D.C. — at the beginning of next month, and consultations will be made in mid-September in preparation for the meeting.”

While the markets once again rallied on the news, this is the same news we have repeatedly seen for the last 18 months. As @stockcats aptly noted:

The last few months has been this gyration of exuberance and disappointment as the market has lived from one “trade headline” to the next.

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