Weekend is here & the Tension Builds - Markets Ignore the data and Focus on NK

***North Korea Rhetoric causing Risk Off around the Globe.....ally's lining up and China warns that they will remain neutral if Chubby does something really stupid.....***

Thursday morning’s note ended with this –

“US futures are down 10 - at 2462.....real short term support is at 2446 - a level we could easily see today if the chatter heats up again.......... a test of 2446 is less than a 1% move....and if he mkts test it today - it will be important to see if buyers defend that position.  Stay tuned.

And that test came and the buyers did NOT defend it….the mkt sold off hard yesterday – S&P ending the day at 2437 - on the continued North Korean tensions as well as WEAK economic data, weak earnings and a surprising increase in OPEC July production …it was a trifecta of sorts…none of the news yesterday could even be perceived as positive…..so traders/investors pushed….sell programs hit the mkt and as discussed – buyers chose not to stand in front of that moving train…….At about 3 pm Trump tuned up the heat even more on Chubby saying that maybe his words ‘fire and fury’ were in fact not tough enough and BOOM….the mkt went lower……… The Dow fell 200 pts (1%), the S&P gave back 35 pts (1.45%),  Nasdaq got hit hard falling 135 pts (2.13%) while the Russell plunged by 24 pts (1.75%)…..

Aside from North Korea – yesterday’s eco data did nothing to allay any fears of a slowdown…PPI (Producer Prices) fell by 0.1% vs. the expectation of an increase of 0.2%.....and retail earnings – well let’s just say ‘it ain’t happening’!  Both Macy’s and Kohl's reported that same store sales continue to decline sending those stocks down by 10% and 5.8% respectively…..and the newest member of the NYSE – Blue Apron – fell by 18% ending the day at $5.14 or down 49% from its June IPO price of $10/sh.  As expected – they cited rising costs and increased competition.

Every sector was under pressure as the pressure builds…….and the mkt and investors just needed a reason to hit the sell button......How long have we been discussing ‘ridiculous valuations’ (see yesterday’s note), that exist because of monetary policy both at home and abroad….How long can the mkt keep going up when the eco data starts to falter?    But no one wanted to the first one out the door – FOMO – because of ‘The Fear of Missing Out’.   We needed a reason – a catalyst to get the herd going…. And we got it…….and while geo-political events will NOT in the long term price mkts – they will in the short term give investors a reason to reconsider……Bottom line - We needed a sell off – Period.  The end.  You can point your finger at any number of issues – but either way – it’s happening just as we are about to enter that ‘seasonally weak period’ of Aug – October. 

 On Wednesday – I said  -

“The mkt is ripe for the picking, especially since we are headed into the seasonally weak period of late August, September and October...Go back and look at the charts between Aug - Oct in 2012, 2013, 2014,  2015, & 2016....(Start there - if that's not enough keep going back.....)”

Yesterday we discussed the Russell and how it is a leading indicator – well after yesterday it has given up its gains for the year,  and is now sitting just on top of its 200-dma……where you can imagine there are a bunch of ‘sell stop’ orders -  and if these get triggered then expect the selling to magnify – especially since a lot of the gains of late are on the back of record margin levels…….so a sell off will put pressure on investors to either put up more cash or ‘sell stocks’ to raise the money to cover margin calls……

[Sell stop orders  are orders to SELL a security if it reaches a certain price - these are typically used to limit losses or at least try to limit losses. - So in this case - if the Index breaches its long term support - then expect that sell stop orders will be triggered - which will put more pressure on an already weak mkt - causing the mkt to go lower]

If the Russell breaches this level at 1369 (the index closed at 1372) then we could easily see it go to 1345/1350 in short order.   Yesterday the S&P broke its 50 dma and will now look to 2410 as the next level of support and this morning's chatter concerning North Korea is not cooling off at all....

Nations are now beginning to take sides.....Australia, Japan, South Korea all lining up with the U.S. - Russia has remained noticeably quiet - while China said that they would remain neutral in the event of a 'first strike' by Chubby - meaning they would not come to his defense if he does something really stupid.

Australian PM Turnbull saying

"The US has no stronger ally than Australia. In terms of defense, we are joined at the hip".

And the VIX – did you see it?  That index is up 100% from the lows of July 26th…….It was 8.84 on July 26th and it is now 16.04 as of yesterday….do the math!  This morning it is up another 5% as the sun rises. 

Gold - which has been up now for 2 weeks is pushing higher again - and this makes sense.  A test of $1300/oz is upon us.....any increase in tensions will send this asset higher still. 

Let's not downplay this.....Chubby has pushed the envelope, Trump has drawn the line and the world cannot sit back - This war of words is now escalating - and while I still think there is a diplomatic solution - mkts around the world are all once again in Risk Off mode (a diplomatic solution will relieve the pressure and we will see mkts rally hard).

Expect the mkts to respond to this crisis......ignoring anything else...we are now upon the weekend....mkts will remain on edge - US futures are off 5 pts in early trading....Support for the S&P is down another 1% from here and with global mkts all down better than 1% it would make sense that investors in the US will fall in line.  Like I said on CNBC on Wednesday - they buyers will be here - but just at much lower levels - so a swift move lower should be expected...........and while there is some eco data today - CPI exp of +0.2% - it won't matter.....

Asian mkts are under pressure - Japan - 0.05%, Hong Kong - 2%, China - 1.85%, and ASX - 1.1%.   European mkts are under pressure as well....FTSE - 1.24%, CAC 40 - 1.12%, DAX - 0.3%, EUROSTOXX - 0.84%, SPAIN - 1.3% , Italy - 1.3%,  Portugal -1%, Switzerland -0.7%, Belgium -0.9%, Ireland-0.7%, Norway -1%, Netherlands -1.1%.

Cavatappi Rustica 

 A  great summer dish as you get to use the fresh tomatoes from the garden and make  a simple yet delicious fresh uncooked sauce.  There is a magic that happens in your kitchen when you take beautiful ripe tomatoes, mix with fresh garlic, basil, s&p, olive oil, red onions, and maybe some really fresh made mozzarella and put it over hot pasta. 

 Essentially - you are making a summer tomato salad and then putting it over pasta....so Dice the tomatoes, slice the red onion, slice the garlic, add chopped basil,  s&p, "splash" of water, and a couple turns of olive oil. 
 Prepare and let it sit out and marinate.  It will create its own juice the longer it sits.  You want it to be room temp when you mix it with the pasta.  If you make it the day before then remove from fridge and let warm up for about 30 mins.....

 Now bring a pot of salted water to a rolling boil - add pasta and cook for 8 / 10 mins....or until aldente.  Strain - always reserving a mugful of water.....return the pasta to the pot - add back 1/4 mug of water to re-moisten.  Toss - wait a min or two so that the pasta absorbs the water...you do not want a puddle of water in the bottom of the pan. 

Now add the tomato salad, chunks of fresh mozzarella and 2 or 3 handfuls of grated Parmegiana cheese and toss well.  Serve immediately in warmed bowls.  Again - set the table outside, turn on some relaxing music to set the mood, light the candles and enjoy the setting sun on a great summer eve.   Never rush - enjoy the moment.  

Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.