Following a very aggressive counter rally off the December lows we remain inside the larger trading range of 2018, other than small pullbacks the Q1 rally remains technically uncorrected, but let’s be clear:
Everybody’s chasing reality here: The US administration, the Fed and Wall Street.
The US administration promised 3-4% GDP growth and shrinking deficits. Neither is happening, growth is slowing and we just had the largest monthly deficit in US history.
The Fed went from autopilot on the balance sheet and rate hikes to neither. Key point: They will not tell you a recession is coming and rate cut risk is rising.
Wall Street predicted continued earnings growth for 2019 now we have an earnings recession at least in Q1 with -3.7% earnings growth a growth estimates for full year 2019 may still be too high.
Given the uniformity of overly positive projections that have turned out not to be true, can everyone simply take a step back and acknowledge some uncertainty here? The answer is apparently no. Wall Street is projecting new market highs to come, any negatives that were not projected in the first place are dismissed as temporary glitches and an inverted yield curve? Not a problem. Don’t worry say investment houses such as Goldman Sachs. Never mind that the indicator has a 85% track record of predicting a recession to come.
So nobody predicted the slowdown, the inversion, the earnings recession, but everybody is busy declaring them to be worthy of ignoring. Got it.
I just can’t help myself. Perhaps this is why Brian Sullivan called me “Sven the Sarcastic” on CNBC this morning
And I do get it, as I outlined in the segment above we have 2 potential upside catalysts in front of us.
A potential China trade deal, a carrot that is continuously dangled in front of markets and perhaps hope that there will be a last Brexit miracle. All possible I suppose, but what if there’s a China trade deal, but a recession is still coming? Nobody is asking that question and the underlying reality is again largely ignored.
Some reality based risk factors to consider:
Global growth continues to slow and Q1 earnings reports/outlooks can ill afford to disappoint. However a coming jump in growth in Q2 would not be surprising as there have been plenty of previous examples of a weak Q1 GDP picture.
Yield curve inversion has a 85% track record of predicting a recession, yet there’s a lot of denial going on that a recession can unfold.
The Upside: With a China deal and/or Brexit miracle a recession may get delayed and this could result in a major rally yet to come for a final game of musical chairs before the eventual rug gets pulled, but let’s not kid ourselves this business cycle is long in the tooth
The Downside: Recession may come a lot sooner than anybody expects. Case 2000/2001. Markets topped in 2000, yield curve inverted, Fed stopped raising rates and 6 months later we had a recession. Looks very similar to now.
The Fed has removed the market carrot of dovishness by going full frontal dovish last week and markets sold off. The Fed has been a key driver of the 2019 rally. Now that carrot is gone and here we are 10 years after the financial crisis with Europe running negative rates and over $10 trillion in negative yield debt floating about and record corporate debt of over $6 trillion. Quite the recovery.
Risk of major topping patterns. Lower highs on all the major indices. Last week the rally stopped just below the January 2018 highs, we need to see new highs or these patterns remain in play.
The 2009 broken trend line has been rejected again. Hence risk remains that Q1 may have been a bear market rally. Unconfirmed (also see “The Reckoning”)
In March the rally diverged significantly and recent highs on $SPX and $NDX were deceiving as they were once again driven by big cap tech while we saw massive underperformance in key indices such as financials, small caps, transports. The message of these indices: Slowdown.
$RUT peaked on February 22nd over a month ago. And look at the underperformance in some of the sectors I mentioned in the interview:
Buybacks are coming out of the system in the next few weeks reducing liquidity.
Q1 earnings and their outlooks. Will companies be forced to reduce outlooks?
And finally: Watch the wedge. It almost broke yesterday, but got saved with gap up today on a relief rally as yields are retreating off of overbought readings on bond and short term oversold readings on indices:
But no worries. Just ignore it all. Perhaps a dovish Fed and a China deal will be enough. What if it’s not?
Did I mention potential major topping patterns?
I guess nobody is asking that question. Too busy chasing reality.
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Author: Tyler Durden