Will the Momo Guys Force the Issue? Keep FED on the Radar

Stocks got smashed on Friday – the Dow losing 500 pts or 2%, the S&P gave up 51 pts or 1.9%, the Nasdaq lost 159 pts or 2.25%, the Transports lost 158 pts or 1.6%, and the Russell Small/Mid Cap gave up 21 pts or 1.5% leaving many traders licking their wounds  by the time the 4 pm bell rang…….  Earlier in the day – as the sun was rising over Wall St and the city was waking up -  Asian mkts had already closed lower and the European mkts were getting hit….(hard)……..fresh economic numbers from China and the EU being cited as the reasons for the burn…… China reported the weakest  industrial production rate since 2015 along with retail sales that took that reading back to 2003!  Europe reported that the Eurozone PMI Index  fell to 51.7  - still in expansionary mode but the lowest level in more than 4 yrs……(anything north of 50 is considered bullish, while sub 50 is considered contractionary and while the number was 51.7 the TREND line is heading DOWN not UP – Capisce?  So, the assumption is that the trend will continue….)

In addition the ECB (European Central Bank) announced that they will END the multi-trillion Euro bond buying program that was launched at the height of the GFC (Great Financial Crisis) and like the FED – it marks a historic moment in the history of the financial world….a history that was born out of the recklessness and greed of the big investment banks to satisfy a policy need (housing) designed during the Clinton Administration and overseen by then FED Chair Alan Greenspan that permeated and infected the civilized world…..but THAT is another story........suffice it to say that – Uncle Mario (Draghi) – President of  ECB (European Central Bank) made good on his promise to move away from the ‘crisis-era’ policies just as the FED began to move away from those policies during the Yellen reign….. Now to be clear – what the ECB is doing was announced months ago…… – they announced that they would stop the 15 Bil euro monthly bond purchases but will continue to reinvest the cash from maturing bonds for an ‘extended period of time’…….so while this is shift – it was 1.  Not Unexpected nor 2.  Will it end support for the mkts…..

BUT when the overall tone is as negative as it has been – even news that was known and  expected can be twisted into a further negative story – adding drama and fear to the broader picture……Look – just like here at home – we want the ECB and other central banks to normalize policy – but as we discussed – no one really knew (or knows) how this is going to turn out…..we (the FED, The ECB, The BoJ, the BoE….etc)  spent a decade on easing policy – taking rates to zero (and in some places negative) while also buying up bonds in order to stabilize the global economies…..so when we move to reverse that policy – you can expect some tectonic shifts as the global economy adjusts and remains in a constant state of change……

So all of this confusion sent the algo’s into a frenzy at first opening lower to find support at the November lows of 2620 ish by 9:45 am….…..causing the mkt to rally back to the 2635 level before finding resistance and very willing sellers…..once again pushing the mkt to re-test those November lows…….but this time pushing just a bit harder causing the mkt to test the October low of 2610 – before finding (weak) support and this caused the algo’s to attempt to rally yet again….only to fail by 11:35 am……and then the rest is history as they say……the day and the tone got worse and worse as another technical failure (the breach of both the October and November lows)  raised the prospects that the weakness across Asia and Europe was going to wash up on our shores sometime in 2019……..and with the FED still in tightening mode what does that do to valuations?  Don’t forget it was also a Friday -and the weekend was upon us – and some of the trader types that are driving so much of the direction these days made sure to go home flat – and to do that you need to sell stocks….so the buyers –  who are willing to buy – bid lower – because WHY would you bid in line when you see a wave of sell orders trying to get out of the door?  I mean its like standing in front of a moving train – Why would you do that?  (Other than the obvious….)  

And so the weekend came and went – There wasn’t any new trade news but the BIS (Bank of Int’l Settlements) – which is an ‘umbrella group for the world’s central banks’ decided that they needed to chime in and opine on the state of the global economy……..warning that the ‘normalization of monetary policy (by central banks) is likely to trigger a flurry of sharp sell offs over the coming months’…..a flurry? Whatever!   Either way – they repeated what we already know and what I and others have been screaming about………Normalization is not going to be a walk in the park…..and with Donny and Xi Xi still unable to come to deal, the global economy seemingly slowing down, the UK divorcing the EU, FED & other central bank policies in the spotlight, stronger dollar/weaker commodities  and renewed political challenges in the UK, Germany, France, Italy and the US – with the Democrats focusing on impeachment – will all create the narrative for continued unrest in the mkts……so hold on….the ride will continue to be full of potholes…..

This morning we wake up to find that stocks in Asia ended the day mixed – no  major moves up or down and European mkts all slightly in the RED – retailers in Europe under pressure -  Asos Plc fell hard after warning the world that their Christmas shopping season got off to a ‘disastrous start’……..Now that may be true for them – but here at home in the US – the retailers are doing just fine…..maybe the online ones better than brick and mortar – but in any case we are not seeing that dynamic play out……..

European mkts are in a wait and see mode for Wednesday’s FED announcement and the UK has just about 100 days until March 29th…….when their divorce is supposed to be finalized……The chances of chaos has clearly gone up……as the reality of ‘no deal’  or a chaotic breakup increase……FTSE – 1.41%, CAC 40 – 0.59%, DAX – 0.42%,. EUROSTOXX – 0.49%, SPAIN – 0.17% and ITALY – 0.95%. 

US futures have been swinging between losses of as much at 8 pts overnight to the UP 3 pts at 7 am……. and this should be considered better than what the expectation was after Friday…You see – when they beat ‘em up and close them on the lows – like they did on Friday - breaking prior technical levels – it usually isn’t a positive sign…it usually signals further weakness ahead…..so you ask – where could we go?  Well – do not be surprised to see us now test the March/April lows of 2555 ish…..which is the real next level of any support at all…..nothing to write home about between here and there…….and while I would like to think that we won’t test it – if we can’t change the story and start to find the positives – then the negatives will outweigh any fundamentals and the momo guys (momentum quant traders – the bane of investors worldwide)  will force the issue….. (just a lesson in etymology:  bane comes from the word bana – which means destroyer or murderer – just sayin’ – if the shoe fits………).

The focus this week is on the FED (along with the other highlighted issues)…..Rates are expected to go higher – so that is NOT a surprise….and expect that everyone will be listening intently as Papa Jay takes the stage to discuss the path of future policy moves…..Now that global growth targets are being ‘adjusted’ by street analysts and the IMF (Int’l Monetary Fund) the BIS etc……we need to find out how the FED may respond…..the original 3 hikes projected for 2019 have now gone to 1 hike for sure with 2 more on ‘hold’…and if the US/China trade talks carry on into the new year – then the likelihood of higher rates diminishes with each passing day……if though, those two come to an agreement then that could clearly change the tone – but it is still a jump ball….Investors will continue to re-price valuations as the reality of growth slows and if inflation – which so far is in check – begins to rear her ugly head then expect that the FED will change their tune as well.   It’s all very fluid……

This morning futures are up 3 pts – but – as noted -we are now in a position to test the March lows – 2555 to see if there is real support……(although this morning it feels like it wants to hold Friday’s close) on the upside – immediate resistance is at 2650 while the down trending 50 dma at 2729 is the longer term issue for the mkts to resolve. 

Oil continues to bounce around at the $50/$52 range……concerns over weakened demand continue to cause concern for the mkts and investors – US drillers cut 4 oil rigs last week taking the total rig count to 873 active rigs which is still 126 MORE rigs than one year ago………..as US energy producers cut back a bit as prices continue to fall…….This along with any OPEC/Saudi cuts will serve to drive down inventory builds providing short term support right here at the $50 level……Look – at $50 a barrel – everyone is still making money – maybe less, but they are still cash flow positive….so no one should be holding a charity event for any of them.  Lower prices are good for the global economy – Period.  A look at the charts is suggesting that $50 is the level that is holding…we have been bouncing around right here for 5 weeks now…..with $55 as the level of resistance……