A Classic Standoff

Markets retreated this week correcting almost 10% after setting new all-time highs on an intraday basis in two US Equity (SPY, QQQ) benchmarks. China announced that it was reducing holdings of US Bonds due to an accelerating trade war. This was part of the catalyst driving the reversal. Similarly, Putin’s playbook and Russia does not include owning any US government debt. Volatility (VXX) jumped +13.8% for the week despite dropping -8.2% on Friday.

Financials also performed well, especially Regional Banks. Utilities and Consumer Staples, both safety plays, outperformed. However, even with rates holding at current levels, the entire yield curve is trading under key technical levels regardless of credit quality.

This week’s highlights are:

  • Risk Gauges are still in showing Risk On despite this week’s large correction
  • All key indexes are wedged between their short-term moving averages but holding their 50 day
  • Market Internals which were weak on the blow-off rally continues to be a drag
  • Value Stocks are making another attempt to assert leadership over growth stocks
  • Regional banks and Utilities were strongest performers
  • US long bond looks heavy despite the Feds intention of keeping rates low for years
  • Momentum is signaling that Technology (XLK) Semi’s (SMH) and Growth Stocks (VUG) are looking tired on their daily charts
  • Clean Energy ((PBW) and Solar (TAN) have been top market performers but gave up the most ( -10%) last week

Risk gauges and the 50 DMA held the selloff in check for all key US equity benchmarks, while volatility and sector rotation point to further weakness. Other measures like option activity point to historic speculative levels hitting 5x times the peaks set in 2000, 2008, and 2018. If you are curious as to where all the bailout money is going …… your search is over.

Meanwhile, longer-term metrics such as Market Cap to GDP (Buffets Indicator) and National Debt to GDP levels show markets to be fully valued although they are not effective at market timing. All this points to a classic standoff between the bulls and bears with a very volatile political situation surrounding the presidential election unfolding.

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