A 'transition phase' - from a market rising on the back of a presumption of a series of Fed rate cuts, indeed would seem to be what's underway. Both a rapid decline and partial rebound yesterday; and then today's smart rally as the Fed Chairman further-clarified the possibility of a mini-rate-cut series as ongoing, certainly is embraced as contributing to the expected rebound. As we also suggested a subsequent 'fade' last night (after the rebound); it really is impossible to say how extensive it would have been absent that 'tweet' on China regarding additional tariffs to be imposed effective September 1. But in any event all of this is within context of our ongoing Summer forecast (for new members that was from late May: up into early-mid-July then rotational corrections with a defensive bias for some weeks if not months; barring for sure successful breakthroughs on the trade-front; more so than the Fed). 

Now, whether the morning rebound was just a 'grinding higher' move based on better backdrops to a muddled message the Fed Chairman 'sort of' gave Wednesday, or appreciation of better times ahead (it's not that); the parsing of every word was telling us that the Fed has engaged in the dreaded 'race to the bottom', as much as of course (we think) they'd prefer not to; and the market clearly telegraphed its affection for the addiction of low rates. It's of course takes a different slant as we envision greater trade-based impacts from higher tariffs (forces the Fed to actually cut more than they'd like and it definitely is more bearish for the U.S. economy if fully carried-out). Play it? Well do realize any morning (or tweet) indicating a trade deal; and off to the races again; at least temporarily. Hence remain nimble even if defensive.  

The economy is in decent shape; but not to justify higher price levels on its own; thus the response by Wall Street (including today's expected rebound back over S&P 3000 before 'la deluge') tells you that this market is addicted to low rates and in fact is increasingly dependent upon that trend. Caution: as history is replete with serious consequences if that prevails too long.  

Hence it's a dangerous game. And our idea was that if a market breaks, one should fade 'not' the decline, but the ensuing rebound as it begins fading. A couple trading fades reflected that on Thursday; as one downside move got lots of traction; but knowing it was associated with 'tweets' on China tends to reinforces hesitation to actually short the market (especially 'after' news).  

Conditions are not what they should be for normal investing; and they've for sure been distorted by the craving for low-rate based justification for buying. Normal should be: if the economy does well, the market does well. But that isn't a realistic view of the market here; even if we're mid-cycle with respect to the economic cycle. We're not however on the eve of recession, whether we're actually facing that, or (more likely) in my opinion we've been in it for a year-plus and readying to exit a sluggish economic environment assessed for over a year now, regardless of a series of S&P moves in both directions. Of course a doubling-down on trade conflict can prolong the agony though.  

That matters, because this is one of the moments where you have markets excessively dependent on monetary ease; less focused on actual results in business; and thus 'hooked' on low rates and easy money. Generally we're retaining our view of United States as more attractive than other regions of the world; and we would be very careful about excessively tying our policy on rates to what's going on globally. However, that's what the Fed's doing.  

In sum: Chairman Powell would be more accurate if he embraced Boston's Rosengren's belief that no cut was appropriate; although after Thursday as the President doubled-down on trade war; the cut looks insufficient (they're really not correlated; it just looks that way to the casual observer I guess).  

Or the Chairman could have said the United States can't offset the supply-chain competitive challenges a slew of foreign countries present, especially China. And that regardless how low we took rates, even if the Fed cut a full point and the market rocketed to a higher level, it would NOT have anything to do with improving revenue for the Nation, or profits for most businesses.  

It's a fiscal policy concern that cannot offset the efforts by the monetary (the Fed) authority. That would be candid; but would not please Wall Street. But not pleasing Wall Street (or the President) may be the lesser-risk to bending in the direction of politics or counter-forces that press the Fed (hence that's a debate as to whether the Fed was influenced by those influences).  

If one has to focus on addiction and trying to get the S&P higher regardless of what happens further out; well that's what those arguing for lower rates in a sense are saying: move the market higher regardless of financial damage or even chaos that may ultimately be enhanced by virtue of such policies. A little pain now, or more pain later, might be a simple way to summarize this. Perhaps Mr. Market, with its forecast Summer corrections, will judge. 

Bottom line: besides the pattern conforming to the idea of rebound to S&P 3000+, and then fade; it's really more involved and was hanging-tough until the President's tweet, which (importantly) was composed with all the major advisors in the room (Mnuchin, Kudlow, Navarro and Mulvaney). That says it's really policy; not simply one of Trump's often-spurious tweets.  

What's hard to define, is whether the playbook is fundamentally different as trade tensions are more likely to escalate than not. And whether the market which focused primarily on central bank liquidity; might find that a President willing to 'tank' trade more significantly; might see a silver lining, in that Fed pressures to cut rates even lower would be hard to resist if the US ventures more deeply into recessionary conditions that predate for well over a year; a condition I've indicated since March of 2018 irrespective of S&P swings.  

For the moment these movements pound any budding 'green shoots' solidly back below the surface; but that too can change 'if' President Xi comes back to the table. That could be exactly what the 'tweets' today are mostly about; if the President really believes China might be waiting for results from a new Election. He probably senses a double-benefit; lower stocks but forcing Fed rate cuts (historically not smart but I'm not his advisor and Kudlow agrees in my opinion with my views; but I don't think he's able to prevail presently and goes along because this is his dream job and to a degree he'll conform); all as it gives China an incentive to stop horsing around and make a real deal.

Conclusion: it matters that the Chinese believe the U.S. will persist just as long or as far (in terms of tariff increases) as needed; whether or not a Fed has to cut further. It emphasizes a bias toward ease; because the economic mix (just ask retailers) actually changes going forward in a negative way. It's not the 1930's; but it's the global economic magnitude of the United States, that matters now; and the implication is that it would be tougher for us years from now; so bite the bullet and deal with this now; whether or not it forces the world into a more bipolar economic set of spheres of influences. 

Got our S&P rallies into early-mid July as anticipated; and with more drama, and expected regardless, we've entered a roller-coaster period of correction and news-sensitive moves with a negative bias until such time as backdrops change. And that includes getting the USMCA deal done; containing North Korea; and avoiding war with Iran; while bringing China to a worthwhile deal that too many proponents (including the Apparel & Footwear group that very much was 'stunned' by my warning to them as keynote speaker in 1977 of what was coming) .. now those same groups bemoan loosing China for the cheap manufacturing (not corrupt; but so long that they became dependent and sacrificed the genuine care for American workers by virtue of focusing a bit too long and definitely too broadly on offshore production).  

A deal with China would both result in lifting tariffs and take pressure off of the Fed regarding further cuts this Fall. And the S&P would instantly soar; a bit more so if the S&P can significantly correct in the interim period.